<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 24, 1996
REGISTRATION NO. 333-04883
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MEDIQUAL SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 7373 36-3112859
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
1900 WEST PARK DRIVE
WESTBOROUGH, MASSACHUSETTS 01581
(508) 366-6365
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
ERIC A. KRISS, PRESIDENT
MEDIQUAL SYSTEMS, INC.
1900 WEST PARK DRIVE
WESTBOROUGH, MASSACHUSETTS 01581
(508) 366-6365
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
VICTOR J. PACI, ESQ. PHILIP P. ROSSETTI, ESQ.
BINGHAM, DANA & GOULD LLP HALE AND DORR
150 FEDERAL STREET 60 STATE STREET
BOSTON, MASSACHUSETTS 02110 BOSTON, MASSACHUSETTS 02109
(617) 951-8000 (617) 526-6000
</TABLE>
------------------------
Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check this box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
MEDIQUAL SYSTEMS, INC.
<TABLE>
REGISTRATION STATEMENT ON FORM S-1
(CROSS REFERENCE SHEET FURNISHED PURSUANT TO ITEM 501(b) OF REGULATION S-K)
<CAPTION>
ITEM NUMBER AND CAPTION IN FORM S-1 LOCATION IN PROSPECTUS
- ----------------------------------- ----------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus.... Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus............................. Inside Front and Outside Back Cover Pages
of Prospectus; Additional Information
3. Summary Information, Risk Factors, and
Ratio of Earnings to Fixed Charges........ Prospectus Summary; The Company; Risk
Factors; Selected Financial Data
4. Use of Proceeds........................... Use of Proceeds
5. Determination of Offering Price........... Outside Front Cover Page of Prospectus;
Underwriting
6. Dilution.................................. Risk Factors; Dilution
7. Selling Security Holders.................. Not Applicable
8. Plan of Distribution...................... Outside Front Cover Page of Prospectus;
Underwriting
9. Description of Securities to be
Registered................................ Description of Capital Stock; Underwriting
10. Interests of Named Experts and Counsel.... Legal Matters
11. Information with Respect to the
Registrant................................ Outside Front Cover Page of Prospectus;
Prospectus Summary; Risk Factors; The
Company; Use of Proceeds; Dividend Policy;
Capitalization; Dilution; Selected
Financial Data; Management's Discussion
and Analysis of Financial Condition and
Results of Operations; Business;
Management; Certain Transactions;
Principal Stockholders; Description of
Capital Stock; Shares Eligible for Future
Sale; Financial Statements; Additional
Information
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................... Not Applicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 24, 1996
PROSPECTUS
2,200,000 SHARES
LOGO
COMMON STOCK
All of the 2,200,000 shares of Common Stock offered hereby are being sold
by the Company. Prior to this offering, there has been no public market for the
Common Stock of the Company. It is currently estimated that the initial public
offering price will be between $9.00 and $11.00 per share. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price. Application has been made to have the Company's Common
Stock approved for quotation on the Nasdaq National Market under the symbol
MDQL.
------------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" ON
PAGE 5.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................... $ $ $
- ------------------------------------------------------------------------------------------------
Total(3)..................................... $ $ $
</TABLE>
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(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $500,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 330,000 additional shares of Common Stock solely to cover
over-allotments, if any. To the extent that the option is exercised, the
Underwriters will offer the additional shares at the Price to Public set
forth above. If all such shares are purchased, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, receipt and acceptance by them, and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1996, at the offices of the agent of
Hambrecht & Quist LLC in New York, New York.
HAMBRECHT & QUIST VOLPE, WELTY & COMPANY
, 1996
<PAGE> 4
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Common Stock offered hereby. This Prospectus, which
constitutes part of the Registration Statement, omits certain of the information
contained in the Registration Statement and the exhibits and schedules thereto
on file with the Commission pursuant to the Securities Act and the rules and
regulations of the Commission thereunder. The Registration Statement, including
exhibits and schedules thereto, may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
at Seven World Trade Center, 13th Floor, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and copies
may be obtained at prescribed rates from the Public Reference Section of the
Commission at its principal office in Washington, D.C. In addition, the Company
is required to file electronic versions of these documents with the Commission
through the Commission's Electronic Data Gathering, Analysis, and Retrieval
(EDGAR) system. The Commission maintains a World Wide Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. Statements contained in this Prospectus as to the contents of any
contract or other document are not necessarily complete and in each instance
reference is made to the copy of such contract or other document, if any, filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference.
As a result of the Offering, the Company will become subject to the
information and reporting requirements of the Securities Exchange Act of 1934,
as amended, and in accordance therewith will file periodic reports, proxy
statements and other information with the Commission. The Company intends to
furnish to its stockholders annual reports containing financial statements
audited by its independent auditors and will make available copies of quarterly
reports for the first three quarters of each fiscal year containing unaudited
information.
------------------------------
MediQual(R) is a registered trademark of the Company. Atlas Outcomes(TM),
Atlas Market View(TM) and Atlas Resources(TM) are trademarks of the Company. All
other trademarks and trade names referred to in this Prospectus are the property
of their respective owners.
------------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus.
THE COMPANY
MediQual Systems, Inc. ("MediQual" or the "Company") is a leading supplier
of clinical information management ("CIM") systems and services to the health
care industry. The Company's systems and services combine proprietary clinical
knowledge with raw patient encounter data to create valuable information that
providers, payors and suppliers use to monitor and enhance the effectiveness,
efficiency and appropriateness of care.
Health care industry participants are under continuing pressure to reduce
costs without jeopardizing quality of care. Increasingly, cost reductions beyond
those achieved through administrative efficiencies are being sought at the
clinical level, and must be supported by a measurable, quantifiable relationship
between services rendered and patient outcomes. This relationship between
services rendered and patient outcomes is imperative to maintaining the
confidence and cooperation of clinicians, and can only be established through
the analysis of patient encounter data, which resides in individual paper files
and is captured, in part, by transaction processing systems. Historically,
health care data analysts have depended upon batch reports produced by large
mainframe computers that required custom programming and long lead times. To
remain competitive, providers, payors and suppliers must develop timely and
actionable information either by installing CIM systems in-house, or by engaging
third-party consultants and analysts.
MediQual has addressed the growing demand for this information by
developing its Atlas System, a comprehensive, desktop CIM system. The Atlas
System is comprised of five major components: (i) a standardized retrospective
data repository; (ii) proprietary benchmarking databases; (iii) embedded
clinical knowledge; (iv) comprehensive provider databases and (v) on-line
analytical processing. The Atlas System enables users to perform sophisticated,
quantitative analyses which may be used for a variety of applications including:
benchmarking internal performance, competitively assessing cost and quality
positions in local markets, quantifying the impact of managed care and capitated
contracts, developing local integrated delivery networks, evaluating the
efficacy of new pharmaceuticals and medical devices, credentialing physicians
and reporting to third parties for regulatory and contract compliance. The
modular design of the Atlas System enables MediQual to integrate additional
applications quickly and easily in order to be responsive to evolving customer
needs.
The Company's CIM systems and services are supported by its proprietary
master database which contains complete clinical and administrative detail on
more than 20 million patient encounters. This master database is continually
expanding as additional patient encounters and new types of data, including
pharmaceuticals and outpatient services, are transmitted to the Company by its
customers. MediQual has developed for substantially all acute diseases more than
200 statistical regression models which are embedded in the Atlas System and
support the Company's analytical services for disease management applications.
MediQual serves approximately 400 customers, including leading hospitals,
community care networks, medical device manufacturers and pharmaceutical firms.
The Company licenses the Atlas System pursuant to annual agreements, and since
1993, has experienced customer renewal rates of 90% or higher.
The Company is subject to certain risks, including but not limited to
dependence on the Atlas System for a majority of the Company's revenues,
dependence on continued access to data, dependence on systems development
introduction and enhancements, competition from other service providers and
dependence on key personnel. The Company has also experienced a limited history
of profitability.
3
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company..................... 2,200,000 shares
Common Stock to be outstanding after the Offering....... 8,264,306 shares(1)
Use of proceeds......................................... For redemption of Class A Preferred
Stock, redemption of warrants,
retirement of debt, working capital
and other corporate purposes. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol.................. MDQL
</TABLE>
------------------------------------
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
MedisGroups......................................... $14,866 $14,700 $13,097 $ 8,459 $ 4,674 $ 2,173 $ 683
Atlas System........................................ -- -- -- 3,150 5,131 2,614 3,662
CIM Services........................................ -- -- -- 475 1,169 500 1,362
------- ------- ------- ------- ------- ------ ------
Total revenues.................................. 14,866 14,700 13,097 12,084 10,974 5,287 5,707
Research and development.............................. 2,647 4,204 4,152 3,626 4,013 2,189 1,328
Operating income (loss)............................... (1,199) (225) (233) 132 (1,392) (1,071) 1,440
Net income (loss)..................................... $(1,414) $ (274) $ (186) $ 282 $(1,462) $(1,092) $1,354
Pro forma:(2)
Net income (loss) per share......................... $ (.21) $ .20
Weighted average shares outstanding................. 6,467 6,982
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED(3)
-------- ---------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................... $ 1,679 $ 1,679 $ 17,615
Working capital......................................................... 288 288 16,380
Total assets............................................................ 4,185 4,185 20,120
Long-term debt, including current portion............................... 259 259 --
Redeemable preferred stock.............................................. 11,509 3,569 --
Stockholders' equity (deficit).......................................... (10,407) (2,468) 17,497
</TABLE>
- ---------------
(1) Excludes (i) 1,813,012 shares of Common Stock reserved for issuance under
the Company's 1987 Nonqualified Stock Option Plan, as amended, and 1996
Stock Incentive Plan, of which 337,292 shares are subject to options at
exercise prices ranging from $1.00 to $9.00 per share, (ii) 26,729 shares of
Common Stock subject to warrants with an exercise price of $2.64 per share
that will be redeemed upon the closing of the Offering for $178,015
(assuming an initial public offering price of $10.00 per share) and (iii)
156,918 shares of Common Stock issuable upon the exercise of other warrants,
at an exercise price of $.80 per share, all outstanding as of June 30, 1996.
See "Capitalization," "Management -- Stock Option Plans" and Notes 6 and 9
of Notes to Financial Statements.
(2) Computed on the basis described in Note 2 of Notes to Financial Statements.
(3) Adjusted to give effect to the sale of the Common Stock offered hereby at an
assumed initial public offering price of $10.00 per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds"
and "Capitalization."
----------------------------------------
Except as otherwise noted, all information in this Prospectus (i) assumes
no exercise of the Underwriters' over-allotment option, (ii) assumes the
redemption of the outstanding Class A Preferred Stock and conversion of the
outstanding Class B and Class C Convertible Preferred Stock into Common Stock on
the closing of the Offering contemplated hereby and (iii) reflects a
one-for-four reverse stock split of Common Stock effected on June 19, 1996. See
"Capitalization," "Description of Capital Stock," "Underwriting" and Notes 6 and
9 of Notes to Financial Statements.
4
<PAGE> 7
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing the Common Stock offered by this Prospectus.
Limited History of Profitability; Possible Unavailability of Net Operating
Losses. The Company's revenue has decreased in each of the past five years and,
as of June 30, 1996, the Company had an accumulated deficit of approximately
$12.3 million. For the fiscal year ended December 31, 1995, the Company incurred
a net loss of approximately $1,462,500. Although the Company has experienced
periods of limited profitability, its profit in the first six months of 1996 was
primarily due to a change in revenue mix as a result of the transition from the
MedisGroups to the Atlas System. As part of the transition to the Atlas System,
the Company was able to reduce its workforce by approximately 30%, resulting in
annual cost savings of approximately $1.1 million, and contributing to a net
profit of approximately $1,354,000 in the first six months of 1996. Despite the
Company's profitable first six months of 1996, there can be no assurance that
revenue growth or profitability can be achieved or sustained in the future. As
of December 31, 1995, the Company had, for tax purposes, net operating loss
carryforwards of approximately $10,342,000 and federal tax credit carryforwards
of approximately $204,000, which under certain circumstances can be used to
offset future taxable income and tax liabilities. The Company has recorded a
full valuation allowance against its otherwise recognizable net deferred tax
asset due to the uncertainty of generating future taxable income sufficient to
offset the net operating loss carryforwards prior to their expiration. Under the
applicable accounting treatment, the Company cannot recognize a deferred tax
asset for the future benefit of its net operating loss carryforwards unless it
concludes that it is "more likely than not" that the deferred tax asset would be
realized. The Internal Revenue Code of 1986, as amended (the "Code"), includes
provisions that may limit the Company's ability to utilize such carryforwards in
connection with a change in ownership (as defined in the Code). Although the
Company does not believe that this Offering will result in a change in
ownership, there can be no assurance that the Company will not in the future
experience a change in ownership that could restrict the Company's ability to
make full use of such carryforwards. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Selected Financial Data."
Dependence on Atlas System. The Company currently derives the majority of
its revenues from licensing of the Atlas System and its related databases and
expects that proportion to increase in the future. Between 1993 and 1995, the
Company made significant investments in the development of the Atlas System. The
Company's future success is contingent upon, among other things, increased
market acceptance of the Atlas System, continued adoption of the system by new
users, and broader distribution of the system through third-party arrangements.
The Company believes that a number of factors will determine whether the Company
will be able to achieve increased market penetration. These factors include
system performance, accuracy of results, ease of implementation and use, user
sophistication and training, reliability and scope of application. Failure to
achieve increased market penetration in the health care industry could reduce
the future growth prospects of the Company and materially adversely affect the
Company's business, results of operations and financial condition. In addition,
the Company believes that as the market for CIM systems matures, heightened
competition will require the successful introduction of new applications,
enhancements and databases for the Atlas System. There can be no assurance that
any of the foregoing will occur.
Dependence on Pennsylvania Mandate; Other State Mandates. The Commonwealth
of Pennsylvania currently mandates the use of the Atlas Outcomes module by acute
care hospitals under its jurisdiction. Pursuant to state law, Pennsylvania acute
care hospitals must report to the state a clinical severity and complication
rate score calculated by Atlas Outcomes. During 1995, approximately 200
hospitals in Pennsylvania licensed Atlas Outcomes, generating revenues for the
Company of approximately $4.5 million, or 41% of the Company's total revenues
for such year. This Pennsylvania mandate is due to expire in 2003, unless
reenacted prior to that date. Should this state law expire without being
reenacted or be modified or repealed, the Company could lose a substantial
number of customers in
5
<PAGE> 8
Pennsylvania who, in the absence of a legal requirement, might cease to license
Atlas Outcomes from the Company. There can be no assurance that the mandate will
be reenacted or that the mandate will not be modified or repealed at any time in
the future.
In September 1996, the Company issued a corrective software release in
response to difficulties experienced by customers in the process of converting
from MedisGroups to the Atlas System. In connection therewith, based upon
discussions between the Company and representatives of hospitals based primarily
in Pennsylvania, the Company undertook to (i) correct all software problems,
(ii) improve the speed of downloading hospital UB92 data to the Atlas System to
equal at least that of MedisGroups, (iii) convert, at the customer's option,
post-1992 historical databases at no charge and (iv) ensure successful customer
installation of the Atlas System. The Company believes that its September 1996
corrective release, together with its annual release planned for December 1996
and certain steps it has taken to streamline data collection, will resolve these
customer difficulties.
A mandate in Iowa with respect to MedisGroups, similar to that in effect in
Pennsylvania, expired in 1994, resulting in a decline of approximately $370,000
in MedisGroups revenues from customers in Iowa in 1995. A similar mandate in
Colorado for MedisGroups expired in 1995; however, all Colorado customers were
subsequently converted to the Atlas System during 1995. There can be no
assurance that future mandates with respect to the Company's offerings will be
enacted in the future and that any such mandates, if enacted, will not expire or
be repealed to the Company's detriment.
Fluctuations in Quarterly Operating Results. The Company's quarterly
operating results have varied in the past and may vary significantly in the
future depending on factors such as success of the Atlas System, amount, timing
and recognition of revenue from significant orders, increased competition, the
proportion of revenues derived from third-party distribution arrangements and
other sources, changes in the Company's pricing policies or those of its
competitors, new system introductions or enhancements by competitors, delays in
the introduction of systems or system enhancements by the Company, market
acceptance of new systems, timing and nature of sales and marketing expenses,
other changes in operating expenses, personnel changes (including the addition
of sales personnel) and general economic conditions. Because the Company
delivers its systems shortly after receipt of an order, the Company typically
does not have a material backlog of unfilled orders, and revenues in any quarter
are substantially dependent on orders booked in the quarter. The Company's
expense levels are based in part on its expectations of future revenues, and the
Company may be unable to reduce spending in a timely manner to compensate for
any shortfall in revenues. If revenues are below expectations, operating results
are likely to be materially adversely affected. Net income may be
disproportionately affected by a reduction in revenues because a significant
portion of the Company's expenses are fixed and correspondingly do not vary with
revenues. The Company may also choose to reduce prices or increase spending in
response to competition or to pursue new market opportunities. In particular, if
new competitors, technological advances by existing competitors or other
competitive factors require the Company to invest significantly greater
resources in research and development efforts, the Company's operating margins
in the future may be materially adversely affected. In addition, the Company has
realized higher revenues in the third quarter of each fiscal year as a result of
the timing of customer renewals and expects this trend to continue. Although the
Company believes that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as indications of
future performance, it is likely that future quarterly operating results could
be below expectations of public market analysts and investors. See "Selected
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Dependence on Annual License Renewals. The Company's systems are licensed
on an annual basis. While the Company has realized historic renewal rates in
each of the past three years of over 90% (including customers in the
Commonwealth of Pennsylvania), and over 85% (excluding customers in the
Commonwealth of Pennsylvania), there can be no assurance that future renewal
rates will be
6
<PAGE> 9
maintained at these levels. A significant reduction in the number of customers
who choose to renew their licenses with the Company could materially adversely
affect the Company's business, results of operations and financial condition.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Marketing and Distribution."
Dependence on Access to Data Sources. The Company believes that the market
acceptance of the Atlas System will be dependent to a significant extent on its
ability to maintain and continue to expand its proprietary Atlas databases.
Currently, the Company obtains health care information data from the federal
government and approximately 20 states, as well as from most of its existing
clients. The Company believes that its success is largely dependent on the
timeliness and integrity of the data that it receives from these data providers,
and in the event that new sources of data are created or made available, its
ability to access such sources. In the event that federal or state agencies were
to cease providing, or prohibit access to, the data of such federal or state
sources or to any newly created data sources, the Company's business, results of
operations and financial condition could be materially adversely affected.
High Degree Of Competition. The market for health care information systems
and services is intensely competitive. Most of the Company's competitors and
potential competitors have significantly greater financial, technical, system
development and marketing resources than the Company. The Company competes
directly with other vendors of health care systems and consultants who provide
related services, as well as the MIS departments of large hospital networks,
some of which have developed, or plan to develop, their own CIM capabilities.
Many of these competitors and potential competitors have substantial installed
customer bases in the health care industry and the ability to fund significant
system development and acquisition efforts. The Company believes that the
principal competitive factors in its market are system functionality and
features, price, training and support, customer references and firm reputation.
There can be no assurance that the Company will be able to compete successfully
in the future or that competition will not materially adversely affect the
Company's business, results of operations and financial condition. See
"Business -- Competition."
Dependence Upon Continued Development, Acceptance and Enhancement. The
market for health care information systems for data analysis is characterized by
continual change and improvement in computer hardware and software technology.
The introduction of systems embodying new technologies or the emergence of new
industry standards could render the Company's existing systems and services
obsolete and unmarketable. The Company's future success will depend on its
ability to enhance its current systems, to introduce new software that keeps
pace with technological developments and to continue to address the complex
needs of its clients. There can be no assurance that the Company will be
successful in developing and marketing enhancements or new system application
add-ons, or that its systems will continue to address adequately the needs of
the marketplace. If the Company's systems do not perform substantially as
expected or are not accepted in the marketplace, the Company's business, results
of operations and financial condition could be materially adversely affected.
See "Business -- Systems and Services."
System and Data Defects. The Company's systems are complex and
sophisticated and could from time to time contain design defects or errors that
could be difficult to detect and correct. Software bugs or viruses may result in
loss of or delay in market acceptance or loss of data. Although the Company has
not to date experienced material adverse effects resulting from any software or
database defects or errors, in September 1996, the Company issued a corrective
release in response to difficulties experienced by customers in the process of
converting to the Atlas System from MedisGroups. In addition, the Company made
certain assurances to such customers regarding the future performance of its
products. Although the Company believes that it has satisfactorily addressed any
software errors that have occurred in the past, there can be no assurance that,
despite testing by the Company and its customers, errors will not be found in
new systems. Any software or database defects or errors in new systems could
result in a delay in, or inability to achieve, market acceptance. The Company
also depends upon the accuracy of the data that it provides to customers, and
the Company believes that it takes adequate precautions to safeguard the
validity of the information entered into its
7
<PAGE> 10
databases. However, if a statistically significant number of medical records
were found to have been altered or entered incorrectly, the Company's business,
results of operations and financial condition could be materially adversely
affected.
Dependence on Third-Party Distribution Arrangements. A component of the
Company's strategy is to use third-party distribution arrangements to reach
certain markets. Revenues generated by such third parties will depend on their
ability to provide the Company's systems to end users, and there can be no
assurance that these third parties will be successful in such efforts. These
third parties generally offer several products, with an increasing number of
vendors competing for access to them. There can be no assurance that these third
parties will continue their current relationships with the Company or that they
will not give higher priority to the sale of other products, which could include
products of competitors. While the Company believes that its current agreement
with SpaceLabs Medical, Inc. and other contemplated alliances will generate
additional revenues, there can be no assurance that the Company's efforts to
expand its distribution arrangements will be successful. See "Business --
Strategy" and "-- Marketing and Distribution."
Dependence on Proprietary Technology. The Company's success is heavily
dependent upon its ability to obtain and enforce intellectual property
protection for its technology, including its Atlas System, related databases,
disease models and statistical methodologies. The Company has no outstanding
patents or patent applications pending for its proprietary technologies, but
instead relies on a combination of copyright, trade secret and trademark laws,
license agreements and software security measures to protect its proprietary
technology and systems. Additionally, the Company enters into nondisclosure
agreements with its employees and license and confidentiality agreements with
its customers and development partners. The Company also takes precautions to
limit access to and distribution of its systems, documentation and other
proprietary information. However, there can be no assurance that the steps taken
by the Company to protect its proprietary rights will be adequate to deter
misappropriation of its technology or independent development by others of
technologies that are substantially equivalent or superior to the Company's
technology. Moreover, the Company could incur substantial costs in protecting
and enforcing its intellectual property rights. From time to time, third parties
may assert patent, copyright and other intellectual property rights to
technologies that are important to the Company. In such an event, the Company
may be required to incur significant costs to resolve any such asserted claims
or may be required to obtain a license to intellectual property rights of such
third parties. There can be no assurance that any such licenses will be
available on reasonable terms, if at all, which could have a material adverse
effect on the Company's business, results of operations and financial condition.
See "Business -- Intellectual Property."
Changes in the Health Care Industry. The health care industry is subject
to changing political, economic and regulatory influences that may affect the
procurement practices and operation of health care industry participants. During
the past several years, the U.S. health care industry has been subject to
changes in governmental regulation of, among other things, reimbursement rates
and certain capital expenditures. Health care industry participants may react to
changes and uncertainty in the health care system by curtailing or deferring
investments, including those for the Company's systems and services.
Additionally, although the United States Food and Drug Administration (the
"FDA") does not currently regulate the Company's systems or services, if
authorized to extend its regulation of software, the FDA could impose extensive
requirements that might negatively impact the time and expense necessary to
develop new systems. The Company cannot predict what impact, if any, such events
might have on its business, results of operations and financial condition.
Further, many health care providers are consolidating to create larger health
care delivery enterprises with greater regional market power. As a result, the
remaining enterprises could have greater bargaining power, which may lead to
price erosion of the Company's systems and services. The failure of the Company
to maintain adequate price levels could materially adversely affect the
Company's business, results of operations and financial condition. See
"Business -- Industry Background."
Management of Growth. Due to the level of technical and management
expertise necessary to support growth, in order to expand, the Company must
recruit and retain highly qualified and well-
8
<PAGE> 11
trained personnel. The number of available persons with the requisite skills to
serve in these positions may be limited, and it may become increasingly
difficult for the Company to hire such personnel over time. Additionally, in the
event the Company is successful in expanding its operations and business, the
operational, management, financial and other resources of the Company may be
strained. To manage growth effectively, the Company must continue to develop its
financial and managerial controls and successfully expand, train and manage its
employees. There can be no assurance that the Company will be able to manage
expansion effectively, or that the Company will be able to recruit, train and
retain sufficient qualified personnel. Any failure to manage the Company's
future growth properly could materially adversely affect the Company's business,
results of operations and financial condition. See "Business -- Marketing and
Distribution" and "-- Employees" and "Management -- Executive Officers and
Directors."
Dependence on Certain Key Personnel. The Company depends to a significant
extent on certain key personnel. Eric A. Kriss, the Company's Chief Executive
Officer, and certain other executive officers have been primarily responsible
for the development and expansion of the Company's business. The loss of the
services of one or more of these individuals could have a material adverse
effect on the Company's business, results of operations and financial condition.
In addition, the Company believes that its future success will be dependent in
part on its continued ability to motivate and retain qualified personnel. There
can be no assurance that the Company will be successful in this regard. The
Company maintains a $1 million "key man" life insurance policy on Mr. Kriss. The
loss of key management team members could have a material adverse impact on the
Company's business, results of operations and financial condition. See
"Business -- Marketing and Distribution" and "-- Employees" and
"Management -- Executive Officers and Directors."
Broad Discretion Over Use of Proceeds; Possible Acquisitions. Management
will have broad discretion in allocating and applying the proceeds of this
Offering, a portion of which may be directed toward possible acquisitions, joint
ventures or licensing arrangements that have not yet been identified. The
Company's stockholders may not have an opportunity to review or vote upon the
terms of any such transaction or to review the financial statements of the other
party to any such transaction. The Company has no understandings, commitments or
agreements with respect to any acquisitions, joint ventures or licensing
agreements as of the date of this Prospectus. However, the Company intends to
pursue actively any such opportunities as may become available and the Company
may compete for acquisition and other strategic opportunities with other
companies that have significantly greater financial and management resources. No
assurance can be given that the Company will successfully complete any
acquisitions, joint ventures or licensing agreements or that if any such
transaction should occur it would not materially and adversely affect the
Company's business, results of operations and financial condition. Additionally,
acquisitions involve numerous risks, including difficulties in the assimilation
of operations and systems, the ability to manage geographically remote units,
the diversion of management's attention from other business concerns, the risks
of entering markets in which the Company has limited or no direct expertise and
the potential loss of key employees of the acquired companies. In addition,
acquisitions may involve the expenditure of significant funds and the incurrence
of significant debt. There can be no assurance that any acquisition will result
in long-term benefits to the Company or that management will be able to manage
effectively the resulting business. See "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Strategy."
No Prior Market; Determination of Public Offering Price; Possible
Volatility of Stock Price. Prior to the Offering, there has been no public
market for the Common Stock and there can be no assurance that an active public
market for the Common Stock will develop or continue after this Offering. Each
of the Representatives of the Underwriters has indicated that it intends to make
a market in the Company's Common Stock following this Offering. However, none of
the Representatives is required to make a market and there can be no assurance
that any Representative will continue to do so. The initial public offering
price will be determined by negotiation between the Company and representatives
of the Underwriters. Among the factors to be considered in determining the
initial public offering price will be prevailing market and economic conditions,
revenues and earnings of the Company,
9
<PAGE> 12
market valuations of other companies engaged in activities similar to those of
the Company, estimates of the business potential and prospects of the Company,
the present state of the Company's business operations, the Company's management
and other factors deemed relevant, and may not be indicative of future market
prices. In addition, the stock markets in general, and the market prices for
high technology and health care companies in particular, have historically
experienced volatility that at times has been unrelated to the operating
performance of such companies. The trading price of the Common Stock could also
be subject to significant fluctuations in response to variations in quarterly
results of operations, changes in earnings estimates by analysts, announcements
of new systems by the Company or its competitors, governmental regulatory
action, developments or disputes with respect to proprietary rights, general
trends in the industry and overall market conditions, and other factors. In
addition, the stock market has from time to time experienced extreme price and
volume fluctuations, which have particularly affected the market price for many
high technology and health care companies and which often have been unrelated to
the operating performance of these companies. These broad market fluctuations
may materially adversely affect the market price of the Company's Common Stock
regardless of the Company's operating performance. See "Underwriting."
Control by Officers and Directors. Following the Offering, and assuming no
exercise of the Underwriters' over-allotment option, officers and directors of
the Company and their affiliates, as a group, will beneficially own
approximately 40% of the outstanding Common Stock. As a result, officers and
directors of the Company and their affiliates, if acting together, would be able
to exert substantial influence over the Company and may effectively control most
matters requiring approval of the stockholders of the Company, including the
election of directors. The voting power of these stockholders under certain
circumstances could have the effect of delaying or preventing a change in
control of the Company and could limit the price that certain investors may be
willing to pay in the future for shares of the Common Stock. See
"Management -- Executive Officers and Directors" and "Principal Stockholders."
Shares Eligible for Future Sale. Sales of substantial amounts of the
Common Stock in the public market after this Offering could adversely affect
prevailing market prices for the Common Stock. In addition to the 2,200,000
shares of Common Stock offered hereby (assuming no exercise of the Underwriters'
over-allotment option or exercise of outstanding stock options or warrants),
approximately 305,628 shares of Common Stock (including shares of Common Stock
issuable upon the exercise of currently exercisable warrants and options to
purchase Common Stock which are exercisable within 60 days of June 30, 1996),
which are not subject to 180-day lock-up agreements (the "Lock-up Agreements")
between the representatives of the Underwriters and the Company's executive
officers and directors and certain other stockholders of the Company, will be
eligible for immediate sale in the public market pursuant to Rule 144(k) under
the Securities Act of 1933, as amended (the "Securities Act"). Approximately
313,998 additional shares of Common Stock (including shares of Common Stock
issuable upon the exercise of currently exercisable warrants and options to
purchase Common Stock which are exercisable within 60 days of June 30, 1996),
which are not subject to the Lock-up Agreements, will be eligible for sale in
the public market in accordance with Rule 144 or Rule 701 under the Securities
Act beginning 90 days after the date of this Prospectus. Upon expiration of the
Lock-up Agreements, 180 days after the date of this Prospectus, approximately
5,990,233 shares of Common Stock (including shares of Common Stock issuable upon
the exercise of currently exercisable warrants and options to purchase Common
Stock which are exercisable within 60 days of June 30, 1996) will be eligible
for sale in the public market, subject to the provisions of Rule 144 under the
Securities Act. Hambrecht & Quist LLC may, in its sole discretion, release any
of the shares subject to the lock-up at any time without notice. Hambrecht &
Quist LLC has no present intention to release any of the shares from the Lock-up
Agreements. It has been the practice of Hambrecht & Quist LLC to consider
releasing any such shares from lock-up agreements based on a variety of factors,
including the market price of the Common Stock, the volume of shares traded and
other market conditions. In addition, holders of an aggregate of approximately
2,357,168 shares of Common Stock and warrants to purchase an additional 156,918
shares of Common Stock will have
10
<PAGE> 13
certain rights to registration of these shares under the Securities Act. See
"Shares Eligible for Future Sale," "Description of Capital Stock -- Outstanding
Registration Rights" and "Underwriting."
Effect of Anti-Takeover Provisions; Availability of Preferred Stock for
Issuance. Certain provisions of the Company's Amended and Restated Certificate
of Incorporation and Amended and Restated By-Laws could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, control of the Company. Such provisions
could limit the price that investors might be willing to pay in the future for
shares of the Common Stock. Certain of these provisions eliminate the right of
stockholders to act by written consent and impose various procedural and other
requirements that could make it more difficult for stockholders to effect
certain corporate actions. In addition, these provisions allow the Board of
Directors of the Company to issue, without any further vote or action by the
stockholders, preferred stock with voting, conversion and other rights and
preferences that may be superior to those of the Common Stock. The issuance of
preferred stock could decrease the amount of earnings and assets available for
distribution to the holders of Common Stock and could adversely affect the
rights and powers, including voting rights, of the holders of the Common Stock.
In certain circumstances, such an issuance could have the effect of decreasing
the market price of the Common Stock. See "Description of Capital Stock."
No Present Intention to Pay Dividends; Restrictions on Payment of
Dividends. The Company has never declared or paid any cash dividends on its
Common Stock. The Company currently intends to retain future earnings, if any,
to fund development and growth of its business and does not anticipate paying
any cash dividends on the Common Stock in the foreseeable future. In addition,
the Company's existing credit facilities prohibit the payment of cash dividends
without the consent of the lenders thereunder. See "Dividend Policy" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Dilution. Purchasers in this Offering will suffer immediate and
substantial dilution in the net tangible book value per share of Common Stock
from the initial public offering price, and may incur additional substantial
dilution upon the exercise of outstanding stock options and warrants by holders
thereof. See "Dilution."
THE COMPANY
MediQual Systems, Inc. was originally incorporated in Illinois in 1980 and
reincorporated as a Delaware corporation in 1984. The Company's corporate
offices are located at 1900 West Park Drive, Westborough, Massachusetts 01581.
Its telephone number is (508) 366-6365.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,200,000 shares of
Common Stock offered by the Company hereby at an assumed initial public offering
price of $10.00 per share are estimated to be $19,960,000 ($23,029,000 if the
Underwriters' over-allotment option is exercised in full). The Company expects
to use a portion of the net proceeds to redeem all 229 outstanding shares of the
Class A Preferred Stock with accrued dividends at a redemption price of
approximately $15,586 per share (assuming redemption as of June 30, 1996) in
accordance with the Company's Amended and Restated Certificate of Incorporation
for an aggregate of $3,569,083, to redeem warrants to purchase 26,729 shares of
Common Stock with an exercise price of $2.64 per share for an aggregate of
$178,015 assuming an initial public offering price of $10.00 per share, in order
to avoid having to issue shares of preferred stock upon exercise of such
warrants, and to retire debt consisting of two notes: one with an aggregate
principal amount of $183,597, which accrues interest at an annual rate of 9.75%
and is payable monthly through July 5, 1997, and the other with an aggregate
principal amount of $75,000, which accrues interest at an annual rate of 10% and
is payable to a director and officer of the Company on or before January 2,
1998. Approximately $900,000 of net proceeds will be used to increase operating
working capital. Management intends to allocate up to $3,000,000 of net proceeds
for
11
<PAGE> 14
internal research, marketing, promotions, sales force development and
information technology infrastructure investment. The remainder of the net
proceeds will be used to expand the Company's business and for possible
acquisitions of products, technologies, and businesses. While the Company
continually evaluates potential acquisitions, the Company has no present
agreements or commitments with respect to any acquisition, nor are any
negotiations regarding any acquisition currently ongoing. Pending such uses, the
Company intends to invest the net proceeds from the Offering in deposits with
banks, short-term investment-grade, interest-bearing securities (including
government obligations) or other similar instruments.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on the Common
Stock. The Company currently intends to retain future earnings, if any, to fund
development and growth of its business and does not anticipate paying any cash
dividends on the Common Stock in the foreseeable future.
12
<PAGE> 15
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996, (i) on an actual basis, (ii) on a pro forma basis to reflect the
conversion of a convertible debenture of the Company into, and the exercise of a
corresponding option for, shares of Common Stock and the conversion of the
outstanding Class B and Class C Convertible Preferred Stock into Common Stock
upon the completion of this Offering and (iii) on a pro forma as adjusted basis
to reflect the application of the estimated net proceeds from the sale of
2,200,000 shares of Common Stock offered hereby at an assumed initial public
offering price of $10.00 per share. This table should be read in conjunction
with the Financial Statements and the Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED(1)
-------- --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term debt...................... $ 157 $ 157 --
======== ======== ========
Long-term debt, less current portion................... 102 102 $ --
-------- -------- --------
Class A Preferred Stock, nonvoting, no par value; 500
shares authorized; 229 shares issued and outstanding,
none as adjusted (at redemption value)............... 3,569 3,569 --
Class B Convertible Preferred Stock, $.01 par value;
6,500,000 shares authorized; 6,316,726 shares issued
and outstanding, none pro forma or as adjusted....... 5,205 -- --
Class C Convertible Preferred Stock, $.01 par value;
2,100 shares authorized; 2,022 shares issued and
outstanding, none pro forma or as adjusted........... 2,735 -- --
-------- -------- --------
Total redeemable preferred stock.................. 11,509 3,569 --
-------- -------- --------
Stockholders' equity (deficit):
Preferred Stock, $.01 par value; 7,000,000 shares
authorized, no shares issued...................... -- -- --
Common Stock; $.001 par value; 30,000,000 shares
authorized; 3,880,776 shares issued and
outstanding, 6,064,306 shares issued and
outstanding pro forma, 8,264,306 shares issued and
outstanding as adjusted(2)........................ 4 6 8
Additional paid-in capital........................... 2,136 10,073 29,834
Accumulated deficit.................................. (12,326) (12,326) (12,326)
Treasury stock; 6,987 shares......................... (19) (19) (19)
Subscription receivable.............................. (202) (202) --
-------- -------- --------
Total stockholders' equity (deficit).............. (10,407) (2,468) 17,497
-------- -------- --------
Total capitalization......................... $ 1,204 $ 1,203 $ 17,497
======== ======== ========
</TABLE>
- ---------------
(1) Pro forma as adjusted reflects (i) the redemption of warrants to purchase
26,729 shares of Common Stock upon the closing of the Offering for $178,015
(assuming an initial public offering price of $10.00 per share), (ii) the
repayment of a note payable to an officer and director of the Company in an
aggregate principal amount of $75,000, and (iii) the forgiveness of a
$201,523 subscription receivable from an officer and director of the Company
pursuant to an agreement between the Company and such officer. See "Certain
Transactions."
(2) Excludes (i) 1,837,292 shares of Common Stock reserved for issuance under
the Company's 1987 Nonqualified Stock Option Plan, as amended, and 1996
Stock Incentive Plan, of which 390,796 shares were subject to options at
exercise prices ranging from $1.00 to $9.00 per share, (ii) 26,729 shares of
Common Stock subject to warrants with an exercise price of $2.64 per share
that will be redeemed upon the closing of the Offering for $178,015
(assuming an initial public offering price of $10.00 per share), and (iii)
156,918 shares of Common Stock issuable upon the exercise of other warrants,
at an exercise price of $.80 per share, all outstanding as of June 30, 1996.
See "Capitalization," "Management -- Stock Option Plans" and Notes 6 and 9
of Notes to Financial Statements.
13
<PAGE> 16
DILUTION
As of June 30, 1996, the Company had a pro forma net tangible book value
(deficit) of $(2,467,655), or $(.41) per share of Common Stock after giving
effect to the conversion into Common Stock of all outstanding shares of the
Class B and Class C Convertible Preferred Stock of the Company upon the closing
of the Offering. "Pro forma net tangible book value" represents the amount of
total tangible assets less total liabilities divided by the number of shares of
Common Stock outstanding. Without taking into account any other changes in net
tangible book value after June 30, 1996, other than to give effect to the
receipt by the Company of the net proceeds from the sale of 2,200,000 shares of
Common Stock offered by the Company hereby at an assumed initial public offering
price of $10.00 per share, the pro forma net tangible book value, as of June 30,
1996, would have been approximately $17,497,143, or $2.12 per share. This
represents an immediate increase in pro forma net tangible book value of $2.53
per share to existing stockholders and an immediate dilution of $7.88 per share
to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price............................... $10.00
Pro forma net tangible book value per share prior to the
Offering....................................................... $(.41)
Increase per share attributable to new investors.................. 2.53
-----
Pro forma net tangible book value per share after the Offering...... 2.12
------
Dilution per share to new investors................................. $ 7.88
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1996,
the differences between existing stockholders and the purchasers of shares in
the Offering (at an assumed initial public offering price of $10.00 per share)
with respect to the number of shares of Common Stock purchased from the Company,
the total consideration paid and the average price per share paid before
deduction of underwriting discounts and expenses relating to the Offering:
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 6,064,306 73.4% $10,487,790 32.3% $ 1.73
New investors................. 2,200,000 26.6 22,000,000 67.7 10.00
--------- ------ ------------ ------
Total....................... 8,264,306 100.0% $32,487,790 100.0%
========= ====== ============ ======
</TABLE>
The foregoing computations assume no exercise of the Underwriters'
over-allotment option or of outstanding stock options or warrants after June 30,
1996. As of June 30, 1996, there were outstanding (i) options to purchase
337,292 shares of Common Stock, with exercise prices ranging from $1.00 to $9.00
per share, (ii) warrants to purchase 156,918 shares of Common Stock, with an
exercise price of $.80 per share and (iii) warrants to purchase 26,729 shares of
Common Stock with an exercise price of $2.64 per share that will be redeemed
upon the closing of the Offering for $178,015 (assuming an initial public
offering price of $10.00). To the extent any of these options or warrants is
exercised, there will be further dilution to new investors. See Notes 6 and 9 of
Notes to Financial Statements.
14
<PAGE> 17
SELECTED FINANCIAL DATA
The selected financial data set forth below for each of the three years
ended December 31, 1993, 1994 and 1995, and at December 31, 1994 and 1995, are
derived from financial statements of the Company audited by Arthur Andersen LLP,
independent public accountants, which are included elsewhere in this Prospectus.
The selected financial data for the years ended December 31, 1991 and 1992 and
at December 31, 1991, 1992 and 1993 are derived from financial statements of the
Company audited by Arthur Andersen LLP, which are not included in the
Prospectus. The financial data for the six months ended June 30, 1995 and 1996
are derived from unaudited financial statements included elsewhere in this
Prospectus. The unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments, which the Company considers
necessary for a fair presentation of its financial position and results of
operations for these periods. Operating results for the six months ended June
30, 1996 are not necessarily indicative of the results that may be expected for
the entire year ending December 31, 1996. The selected financial data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Conditions and Results of Operations" and the Financial Statements
and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
MedisGroups............................. $14,866 $14,700 $13,097 $ 8,459 $ 4,674 $ 2,173 $ 683
Atlas System............................ -- -- -- 3,150 5,131 2,614 3,662
CIM Services............................ -- -- -- 475 1,169 500 1,362
------- ------- ------- ------- ------- ------- ------
Total revenues........................ 14,866 14,700 13,097 12,084 10,974 5,287 5,707
Operating expenses:
Cost of revenues and customer support... 3,962 3,605 2,852 2,998 2,445 1,328 931
Marketing and distribution.............. 4,613 3,997 2,505 1,927 1,970 1,114 490
Research and development................ 2,647 4,204 4,152 3,626 4,013 2,189 1,328
General and administrative.............. 3,455 2,515 2,198 3,401 3,358 1,727 1,619
Restructuring charge (credit)........... 1,388 604 1,623 -- 580 -- (102)
------- ------- ------- ------- ------- ------- ------
Total operating expenses.............. 16,065 14,925 13,330 11,952 12,366 6,358 4,266
------- ------- ------- ------- ------- ------- ------
Operating income (loss)................... (1,199) (225) (233) 132 (1,392) (1,071) 1,441
Interest expense (income), net............ 264 31 (55) (173) 70 21 (98)
------- ------- ------- ------- ------- ------- ------
Income (loss) before income taxes......... (1,463) (256) (178) 305 (1,462) (1,092) 1,539
Provision (benefit) for income taxes...... (49) 18 8 23 -- -- 185
------- ------- ------- ------- ------- ------- ------
Net income (loss)......................... $(1,414) $ (274) $ (186) $ 282 $(1,462) $(1,092) $1,354
======= ======= ======= ======= ======= ======= ======
Pro forma:(1)
Net income (loss) per share............. $ (0.21) $ 0.20
Weighted average shares outstanding..... 6,467 6,982
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1996
------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 158 $ 394 $ 2,401 $ 1,226 $ 1,006 $ 1,679
Total assets................................. 5,688 4,760 6,483 4,865 3,231 4,185
Long-term debt, including current portion.... 1,319 786 399 750 1,019 259
Redeemable preferred stock................... 8,317 8,389 10,594 10,986 11,281 11,509
Stockholders' equity (deficit)............... (9,933) (10,184) (10,441) (10,485) (12,227) (10,407)
</TABLE>
- ---------------
(1) Computed on the basis described in Note 2 of Notes to Financial Statements.
15
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
MediQual is a leading supplier of clinical information management ("CIM")
systems and services to the health care industry. The Company's systems and
services combine proprietary clinical knowledge with raw patient encounter data
to create valuable information that providers, payors and suppliers used to
monitor and enhance the effectiveness, efficiency and appropriateness of care.
The initial version of the Company's CIM system, MedisGroups, was
introduced in 1987. In April 1994, the Company began replacing MedisGroups,
which was rapidly becoming obsolete, with a series of integrated modules
marketed as the Atlas System. Over the five-year period beginning in January
1991, revenues derived from MedisGroups declined as a result of both fewer unit
licenses and price reductions, reflecting, in part, the advancing obsolescence
of that system. In April 1994, the Company released the first module of its
Atlas System. Over the two-year period ending April 1996, the Company released
two additional Atlas System modules, thereby fully replacing the MedisGroups
system and significantly expanding the capabilities of the Company's systems.
Concurrently, the Company began the process of converting existing MedisGroups
licenses to licenses for the Atlas System. The Company no longer directs any
efforts toward developing, licensing or supporting MedisGroups, because the
Company has successfully converted over 90% of MedisGroups users to the Atlas
System. Such former MedisGroups users have renewed Atlas System licenses at a
rate approximately equal to the Company's historical customer renewal rate.
MediQual also provides CIM services, including analytic services for the
management of various diseases, data abstraction services and development of
custom databases.
Prior to 1994, substantially all of the Company's revenues were derived
from licensing the MedisGroups system. Since 1993, MedisGroups revenues have
significantly declined while revenues derived from licensing the Atlas System
and from CIM Services have significantly increased. The following table shows
the amounts and percentages of the Company's total revenues represented by
MedisGroups, the Atlas System and CIM Services for the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------------------- ------------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------- --- ------- --- ------- --- ------ --- ------ ---
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
MedisGroups.......... $13,097 100% $ 8,459 70% $ 4,674 43% $2,173 41% $ 683 12%
Atlas System......... -- -- 3,150 26 5,131 47 2,614 49 3,662 64
CIM Services......... -- -- 475 4 1,169 10 500 10 1,362 24
------- --- ------- --- ------- --- ------- --- ------- ---
Total revenues..... $13,097 100% $12,084 100% $10,974 100% $5,287 100% $5,707 100%
======= === ======= === ======= === ======= === ======= ===
</TABLE>
The Company believes that as the market for Atlas Systems and CIM services
matures, the continued growth of the Company will require the successful
introduction, development or acquisition of new applications and further
enhancements to its existing systems and services. In order to achieve increased
market penetration of the Atlas System, the Company plans to continue to (i)
develop complementary application modules and databases to license to new
customers and cross-market to existing customers, (ii) develop improved user
interfaces to simplify customer use of the Atlas System, (iii) provide on-going
training seminars to help customers improve their analytical use of the Atlas
System and (iv) expand the Atlas System to collect new types of data which will
allow the Company to develop and license additional applications and comparative
databases to its customers.
The Company licenses its systems pursuant to annual agreements that provide
for the payment of license fees at the beginning of the term. The sales cycle,
which may vary depending on the extent of a prospective customer's planned scope
of usage, generally ranges from three to nine months. Customer renewal rates
were 97%, 90% and 92% in 1993, 1994 and 1995, respectively. Annual license fee
revenues
16
<PAGE> 19
are recognized upon shipment of the systems or on the annual renewal date. A
portion of the annual fee (ranging from 5% to 20%, depending on the number of
Atlas System modules licensed by a customer) attributable to customer support is
recognized ratably over the term of the agreement. Revenues from CIM services
are recognized when services are rendered.
The Company's operating expenses consist primarily of personnel costs,
including compensation, sales commissions and employee benefits. Between 1993
and 1995, the Company invested approximately $11 million in the development of
the Atlas System while maintaining the MedisGroups system. As of June 30, 1996,
the Company had completed development of the Atlas System, but intends to
continue to develop enhancements and new applications, including three
enhancements that the Company expects to introduce by early 1997. See
"Business--Systems and Services; Atlas System Enhancements and Specialized
Versions Under Development." As a result, the Company believes the aggregate
amount of research and development expenses, including personnel costs, for the
Atlas System in the future will be substantially lower than that incurred in
1995 when the Company was required to expend substantial amounts in connection
with the introduction of the Atlas System. The following table shows the
research and development expenses attributable to each of the Company's systems
for the periods presented:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- -----------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
RESEARCH AND DEVELOPMENT
MedisGroups......................... $1,246 $ 725 $ 401 $ 219 $ --
Atlas System and CIM Services....... 2,906 2,901 3,612 1,971 1,328
------ ------ ------ ------ ------
$4,152 $3,626 $4,013 $2,189 $1,328
====== ====== ====== ====== ======
</TABLE>
MedisGroups required a significant amount of installation, custom
programming and other support costs. The Atlas System eliminated the need for a
substantial portion of these expenses through technological improvements.
However, because the conversion of the Company's customers to the Atlas System
occurred gradually since April 1994, the Company was required to maintain
significant levels of support for both MedisGroups and the Atlas System during
that period. As a result, the Company incurred substantially higher expenses
during this two-year period than the Company expects to incur in the future in
connection with supporting the Atlas System alone. In addition, the Company
consolidated customer support into a central location between late 1993 and
early 1994. The Company intends to expand fee-based seminar services to help
customers improve their analytical use of the Atlas System. The following table
shows the cost of revenues and customer support expenses attributable to each of
the Company's systems for the periods presented:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------- -----------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
COST OF REVENUES AND CUSTOMER SUPPORT
MedisGroups......................... $2,852 $1,800 $ 978 $ 531 $ 28
Atlas System and CIM Services....... -- 1,198 1,467 797 903
------ ------ ------ ------ ----
$2,852 $2,998 $2,445 $1,328 $931
====== ====== ====== ====== ====
</TABLE>
17
<PAGE> 20
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the statement of operations of the Company as a percentage of total
revenues:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------- ------------------
1993 1994 1995 1995 1996
----- ----- ----- ------ -----
<S> <C> <C> <C> <C> <C>
Total revenues............................ 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of revenues and customer support... 21.8 24.8 22.3 25.1 16.3
Marketing and distribution.............. 19.1 16.0 18.0 21.1 8.6
Research and development................ 31.7 30.0 36.6 41.4 23.3
General and administrative.............. 16.8 28.1 30.6 32.7 28.4
Restructuring charge (credit)........... 12.4 0.0 5.2 0.0 (1.8)
---- ---- ---- ---- ----
Total operating expenses............. 101.8 98.9 112.7 120.3 74.8
---- ---- ---- ---- ----
Operating income (loss)................... (1.8) 1.1 (12.7) (20.3) 25.2
Interest expense (income), net............ (0.4) (1.4) 0.6 0.4 1.8
---- ---- ---- ---- ----
Income (loss) before income taxes......... (1.4) 2.5 (13.3) (20.7) 27.0
Provision for income taxes................ 0.1 0.2 0.0 0.0 3.3
---- ---- ---- ---- ----
Net income (loss)......................... (1.5)% 2.3% (13.3)% (20.7)% 23.7%
==== ==== ==== ==== ====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Revenues. Total revenues for the six-month period ended June 30, 1996
increased by 8% to $5,707,000 from $5,287,000 for the same period of the prior
year. The overall growth is attributable to a combination of a 40% increase in
Atlas System license fees and a 172% increase in CIM services revenue offset by
a 69% decline in MedisGroups license fees from $2,173,000 to $683,000.
Cost of Revenues and Customer Support. Cost of revenues and customer
support expenses for the six-month period ended June 30, 1996 decreased by 30%
to $931,000 from $1,328,000 for the same period of the prior year. The overall
decrease resulted from a combination of the phase-out of MedisGroups support and
a 13% increase in Atlas System support. The Company has made significant
enhancements to the Atlas System, including on-line help and desktop tutorials,
which reduce support demands. During 1995, the Company also initiated an
electronic bulletin board and the use of remote-access support via modem. In
addition, a simplified 1995 redesign of the Atlas Glossary has reduced training
and support needs for data collection activities.
Marketing and Distribution. Marketing and distribution expenses for the
six-month period ended June 30, 1996 decreased by 56% to $490,000 from
$1,114,000 for the same period of the prior year. Beginning in the first quarter
of 1995, the Company began its transition from relying solely on field sales
representatives to a combination of telemarketing and direct field sales to
reduce the costs of its direct sales force and improve operating margins.
Research and Development. Research and development expenses for the
six-month period ended June 30, 1996 decreased by 39% to $1,328,000 from
$2,189,000 for the same period of the prior year. The overall decrease is the
combination of a decline in support required to maintain MedisGroups and the
planned development enhancements relating to the Atlas System. In December 1995,
the Company significantly reduced its research and development staff in
anticipation of the completion of the Atlas System during the first quarter of
1996. The Company also incurred lower expenses in 1996 attributable to the
operation of its data center.
General and Administrative. General and administrative expenses for the
six-month period ended June 30, 1996 decreased by 6% to $1,619,000 from
$1,727,000 for the same period of the prior year. The Company attributes the
decrease to general efficiencies derived from improved office automation, the
18
<PAGE> 21
consolidation of field offices and reduced depreciation, resulting from the fact
that the Company was required to make relatively few purchases of property and
equipment, having undergone substantial office expansion in the prior year.
Restructuring Charge (Credit). During the six months ended June 30, 1996
the Company was able to negotiate a favorable settlement for certain excess
leased facilities, resulting in a restructuring credit of approximately
$102,000. The Company does not anticipate any further adjustments relating to
the restructuring effected in December 1995.
Interest Expense (Income), Net. Interest expense (income), net increased
by 567% from interest expense of $21,000 to interest income of ($98,000) for the
six-month periods ended June 30, 1995 and 1996, respectively. The increase was
primarily due to additional interest at a rate of 9.25% incurred on the
Company's bank borrowing during 1995. The Company was required to increase its
borrowings in 1995 in order to offset the Company's negative cash flow during
such year.
Income Taxes. The provision for income taxes for the six month period
ended June 30, 1996 of $185,000 represents minimum federal and state income
taxes. The Company has available net operating loss and tax credit carryforwards
to be used to minimize income taxes payable to the federal government and
certain states.
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
Revenues. Total revenues decreased by 8% from $13,097,000 in 1993 to
$12,084,000 in 1994, and decreased by 9% to $10,974,000 in 1995. The overall
decrease is a combination of a decline of $8,423,000, or 64%, in MedisGroups
license fees between 1993 and 1995 which was not entirely offset by an
approximately $10 million increase in revenues derived from the introduction of
the Atlas System and related CIM services during 1994 and 1995. The Company
attributes the decline in MedisGroups license fees to the expiration of state
mandates in several markets, the absence of new MedisGroups applications which
could be cross-marketed to existing customers and the conversion of MedisGroups
customers to the Atlas System. A mandate in Iowa for MedisGroups expired in
1994, resulting in a decline of approximately $370,000 in MedisGroups Iowa
renewals in 1995. A similar mandate in Colorado for MedisGroups expired in 1995;
however, all Colorado customers were subsequently converted to the Atlas System
during 1995.
Cost of Revenues and Customer Support. Cost of revenues and customer
support expenses increased by 5% from $2,852,000 in 1993 to $2,998,000 in 1994,
and decreased by 18% to $2,445,000 in 1995. In 1993, the Company merged eight
customer support field offices into its headquarters in Massachusetts. This
consolidation resulted in higher costs in 1994 to replace staff choosing not to
relocate and certain redundant salary costs for a portion of the year. The
decrease in 1995 reflected a combination of the phase-out of support required by
MedisGroups and a 22% increase in support related to the Atlas System.
Marketing and Distribution. Marketing and distribution expenses decreased
23% from $2,505,000 in 1993 to $1,927,000 in 1994, and increased by 2% to
$1,970,000 in 1995. The Company consolidated its field sales offices during 1994
and increased the use of telemarketing, resulting in reduced field sales
compensation, travel and office expenses. The Company attributes the increase in
marketing and distribution expenses in 1995 to increased telemarketing activity
related to the Atlas System.
Research and Development. Research and development expenses decreased by
13% from $4,152,000 in 1993 to $3,626,000 in 1994, and increased by 11% to
$4,013,000 in 1995. The overall decrease is a combination of the decline in
research and development required to maintain MedisGroups and the planned
development cycle relating to the Atlas System. In late 1994, the Company also
made capital improvements in its data center to begin the conversion from a VMS
to a UNIX operating environment. In 1995, the overall increase in research and
development expenses can be attributed to expenses for software license fees,
employee training and consultants relating to these capital investments.
19
<PAGE> 22
General and Administrative. General and administrative expenses increased
by 55% from $2,198,000 in 1993 to $3,401,000 in 1994, and decreased by 1% to
$3,358,000 in 1995. The Company attributes the increase in general and
administrative expenses in 1994 to additional office expense for the Company's
data warehousing operations, increased expense for leasehold improvements made
to the Company's headquarters and additional depreciation expense for capital
investments made in 1994. General and administrative expenses decreased in 1995
as a result of the termination of the Company's Pennsylvania office lease and
lower consulting and travel expenses.
Restructuring Charge (Credit). In 1993, the Company recorded a $1,623,000
charge to consolidate all of the Company's field operations and to write off all
remaining capitalized software costs related to discontinued systems and
obsolete equipment. The provision included severance payments, extended
benefits, asset write-offs and reserves in connection with the restructuring. In
1995, the Company recorded a $580,000 charge to reflect a staff reduction and
office space consolidation. The provision includes severance payments, rent
payments for idle office space and asset write-offs in connection with the staff
reduction. The Company's policy is to write off assets disposed of or deemed to
be excess or obsolete at the time the assets no longer have value to the
Company's ongoing operations.
Interest Expense (Income), Net. Interest expense (income), net increased
by 215% from income of ($55,000) in 1993 to income of ($173,000) in 1994, and
decreased by 140% to an expense of $70,000 in 1995. The increase in 1994 was
primarily due to a favorable settlement of a lawsuit with a former employee
regarding repayment of a loan to the employee. The receivable from the employee
was written off in 1993. The decrease in 1995 was due to additional interest
expense incurred on the Company's bank borrowings during 1994 and 1995.
Income Taxes. The provision for income taxes in 1993 and 1994 primarily
represents minimum taxes in certain states. The Company had available net
operating loss and tax credit carryforwards of $10,342,000 and $204,000 at
December 31, 1995, which have been fully reserved due to the uncertainty
relating to the utilization of the carryforwards.
20
<PAGE> 23
SELECTED QUARTERLY FINANCIAL RESULTS
The Company's quarterly operating results have been and likely will
continue to be subject to significant fluctuations. The Company has experienced
a fluctuating pattern in its operating results with the third quarter typically
having the highest revenue and net income compared to the immediately preceding
and following quarters. The Company believes this fluctuation can be
attributable to the timing of renewals under annual license agreements with its
customers.
The following tables present quarterly unaudited financial information for
each of the six quarters for the period ended June 30, 1996. This unaudited
financial information includes all adjustments, consisting only of normal
recurring adjustments, which the Company considers necessary for a fair
presentation of its financial position and results of operations for these
periods. The operating results for any quarter are not necessarily indicative of
the results that may be expected for any future quarter.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1995 1995 1995 1995 1996 1996
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
MedisGroups(1)............ $ 1,166 $1,007 $ 1,300 $1,201 $ 683 $ --
Atlas System.............. 1,259 1,355 1,333 1,184 1,590 2,072
CIM Services.............. 216 284 321 348 466 896
------ ------ ------ ------ ------ ------
Total revenues.......... 2,641 2,646 2,954 2,733 2,739 2,968
Operating expenses:
Cost of revenues and
customer support........ 677 652 525 592 379 553
Marketing and
distribution............ 492 622 459 398 256 234
Research and
development............. 1,155 1,034 1,010 814 628 700
General and
administrative.......... 842 885 816 815 787 832
Restructuring charge
(credit)................ -- -- -- 580 -- (102)
------ ------ ------ ------ ------ ------
Total operating
expenses............. 3,166 3,193 2,810 3,199 2,050 2,217
------ ------ ------ ------ ------ ------
Operating income (loss)...... (525) (547) 144 (466) 689 751
Interest expense (income),
net....................... 13 8 25 24 27 (125)
------ ------ ------ ------ ------ ------
Income (loss) before income
taxes..................... (538) (555) 119 (490) 662 876
Provision for income taxes... -- -- -- -- 77 107
------ ------ ------ ------ ------ ------
Net income (loss)............ $ (538) $ (555) $ 119 $ (490) $ 585 $ 769
====== ====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) The substantial decrease in revenues derived from MedisGroups in the
three-month periods ended March 31 and June 30, 1996 is attributable to the
completion of the Company's Atlas System, the subsequent conversion of
MedisGroups licenses to Atlas System licenses and the corresponding
diminished need for MedisGroups support.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and met its capital requirements
through approximately $10 million generated by private placements of securities,
the utilization of bank lines of credit and capital leases. At June 30, 1996,
the Company's principal sources of liquidity consisted of cash and cash
equivalents and trade accounts receivables. The Company has a working capital
line of credit with Silicon Valley Bank (the "Bank") under which it may borrow
up to $1,500,000, subject to 75% of eligible accounts receivable. At June 30,
1996, the Company had no borrowings under this line of credit. The working
capital line of credit is secured by all the Company's assets and requires the
Company to maintain certain financial ratios and adhere to certain covenants
(including covenants not to participate in any merger or consolidation, pay any
dividends or dispose of any material assets
21
<PAGE> 24
without the Bank's consent). As a result of the Company's net loss during 1995,
at December 31, 1995, the Company was not in compliance with the profitability
and tangible net worth covenants under its working capital line of credit with
the Bank. On April 25, 1996, the Bank waived its remedies with respect to all
past failures to comply with these covenants. Although MediQual had no
borrowings under its working capital line of credit at June 30, 1996, the
Company intends to comply with these covenants in the event that the Company
borrows against this line of credit in the future.
At November 20, 1995, the Company was also in default of certain
obligations under a convertible debenture issued in settlement of a dispute as
to amounts owed with respect to certain royalty obligations owed to a former
product development partner. In June 1996, the debenture was converted pursuant
to its terms into approximately 52,070 shares of Common Stock at the stated
conversion price of $4.84 per share.
The Company's profitability for the six months ended June 30, 1996 has
resulted in an increase in net cash of approximately $800,000. In addition, the
Company has received approximately $440,000 from the exercise of stock options
and the sale of treasury stock.
As of December 31, 1995, the Company had, for tax purposes, net operating
loss carryforwards of approximately $10,342,000 and federal tax credit
carryforwards of approximately $204,000, which can be used to offset future
taxable income and tax liabilities. The Code includes provisions that may limit
the Company's ability to utilize such carryforwards in connection with a change
in ownership (as defined therein). The Company does not believe that this
Offering will result in a change in ownership.
The Company does not currently have any significant capital commitments.
The Company believes that the net proceeds of the Offering, together with
existing cash balances, funds available under the Company's credit lines and
funds expected to be generated from future operations, will be sufficient to
fund its operations and satisfy its working capital needs for the foreseeable
future.
22
<PAGE> 25
BUSINESS
OVERVIEW
MediQual Systems, Inc. is a leading supplier of clinical information
management ("CIM") systems and services to the health care industry. The
Company's systems and services combine proprietary clinical knowledge with raw
patient encounter data to create valuable information that providers, payors and
suppliers use to monitor and enhance the effectiveness, efficiency and
appropriateness of care.
MediQual has addressed the growing demand for this information by
developing its Atlas System, a comprehensive, desktop CIM system. The Atlas
System is comprised of five major components: (i) a standardized retrospective
data repository; (ii) proprietary benchmarking databases; (iii) embedded
clinical knowledge; (iv) comprehensive provider databases and (v) on-line
analytical processing. The Atlas System enables users to perform sophisticated,
quantitative analyses which may be used for a variety of applications including:
benchmarking internal performance, competitively assessing cost and quality
positions in local markets, quantifying the impact of managed care and capitated
contracts, developing local integrated delivery networks, evaluating the
efficacy of new pharmaceuticals and medical devices, credentialing physicians
and reporting to third parties for regulatory and contract compliance. The
modular design of the Atlas System enables MediQual to integrate additional
applications quickly and easily, in order to be responsive to evolving customer
needs.
INDUSTRY BACKGROUND
The health care industry, which exceeded $1 trillion in 1995, continues to
experience cost escalation. Health care providers, payors and suppliers remain
under pressure to reduce costs without jeopardizing quality of care. The health
care industry initially responded to this pressure primarily by reducing
administrative costs, such as those associated with non-clinical staff, and
through the negotiation of supply discounts. Further cost reductions will
require intervention at the clinical level where resource use may directly
impact patient care. Implementing changes at the clinical level must be
supported by a measurable, quantifiable relationship between services rendered
and patient outcomes to maintain the confidence and cooperation of clinicians.
As a result, providers, payors and suppliers are seeking more sophisticated
clinical information to enable them to compare performance to quality and cost
benchmarks, and to monitor or enhance clinical outcomes.
Clinical information is derived from patient encounter data, the majority
of which resides in individual paper files with limited analytical usefulness.
Some patient encounter data is captured by on-line transaction processing
("OLTP") systems. Many hospitals, for example, have automated administrative
functions such as patient admission and billing. As a by-product of this
automation, certain OLTP systems save ICD-9 diagnostic and procedure codes,
treatment charges and patient demographics, collectively known as UB-92 data
(based on the administrative billing standard designed by Health Care Financing
Administration). Other OLTP systems involved in concurrent patient treatment,
such as laboratory, radiology and pharmacy systems, can digitally store certain
clinical data, but do so without the benefit of a federal coding standard. Thus,
administrative OLTP data, which does not contain clinical elements, can be
aggregated based on its UB-92 standardization, while clinical OLTP data cannot
be aggregated without additional preparation.
The refinement of patient data for analytical use requires several
processing steps, which are as follows: (i) integrating patient encounter data
from sources such as paper files and administrative and clinical OLTP systems;
(ii) mapping clinical data elements into proprietary classifications and (iii)
aggregating data into a retrospective repository. Specifically, clinical OLTP
data must first be mapped to standardized definitions, filtered to remove
extraneous material, such as free-form text, and integrated with UB-92 data. The
combined clinical OLTP and UB-92 data must then be translated into discrete time
frames and enhanced, as required by the intended applications, by the
abstraction of paper-based data. OLTP systems cannot perform these processing
steps.
Health care data analysts increasingly require a solution that processes
internal patient encounter data into an analytic repository and that also
enables comparisons against a variety of external
23
<PAGE> 26
benchmarks, both proprietary and public (the federal government and
approximately 20 states release UB-92 data). The increasing level of payor
sophistication requires that encounter data be adjusted for differing patient
severity so that meaningful comparisons and statistically significant
conclusions can be made.
Until recently, providers, payors and suppliers were dependent upon batch
reports produced by MIS personnel using large mainframe computers. Modification
of such reports generally requires custom programming and long lead times, and
such a process is not easily adaptable to ad hoc queries. Rapid technological
advancements in personal computing creates an opportunity for desktop clinical
information management systems that support an iterative approach known as
on-line analytical processing. Such an approach involves rapid changes in
perspective, from summary to detail level, as well as techniques, such as the
addition or deletion of selection criteria, that continuously refine the topic
under study. To remain competitive, providers, payors and suppliers must develop
timely and actionable information either by installing CIM systems in-house, or
by engaging third-party consultants and analysts.
THE MEDIQUAL SOLUTION
MediQual has addressed the need for sophisticated health care information
by developing a comprehensive, low-cost desktop CIM system for providers, payors
and suppliers. The Company also provides comprehensive CIM services, including
data analysis and abstraction, for those clients who wish to enhance their
access to and use of such information. MediQual's systems and services
systematically analyze effectiveness (whether a particular treatment helped the
patient); efficiency (whether the proper resources were used to provide care);
and appropriateness (whether the chosen treatment was the best option). The
resulting analyses assist customers in delivering high quality, low cost care.
STRATEGY
MediQual's objective is to strengthen its position as a leading supplier of
CIM systems and services to health care providers, payors and suppliers. Key
elements of the Company's strategy to achieve this objective include:
Leverage Proprietary Master Database. The Company has developed a
proprietary database comprised of integrated clinical and administrative data
derived from more than 20 million patient encounters. The Company's master
database is continually expanded as additional patient encounters, as well as
new types of data, including pharmaceuticals and outpatient services, are
transmitted to the Company by its customers. The Company believes this expanded
master database will allow it to develop new databases and applications.
Cross-Marketing to Existing Customer Base. The modular design of the Atlas
System enables the Company to license additional databases and applications to
existing customers. For example, Mortality BenchMark, a new database covering 16
high risk topics (e.g., pneumonia, stroke and congestive heart failure), permits
users to compare internal results to those of the top performers in MediQual's
master database, and has been licensed to a significant number of existing
customers.
Extend Analytical Services. MediQual believes that there is a significant
opportunity to extend its analytical services into disease management
applications. For example, in conjunction with Ethicon Endo-Surgery, Inc., a
subsidiary of Johnson & Johnson, the Company provides analytical services for
the management of hysterectomies. These services involve linking claims data to
clinical records and include a comparison of different hysterectomy surgical
techniques, which allow providers and payors to evaluate relative
cost-effectiveness. The Company intends to enter into similar arrangements for
other disease management applications.
Expand System Application Offerings. The Company plans to expand its
system application offerings to leverage its existing investment in the Atlas
System and to be responsive to evolving customer needs. The modular design of
the Atlas System enables rapid integration of additional applications through
both internal research and development and acquisitions of new technologies and
24
<PAGE> 27
businesses. The Company plans to release three add-on applications by mid-1997.
See "Business -- Systems and Services; Atlas System Enhancements and Specialized
Versions Under Development."
Form Alliances to Broaden Distribution. The Company seeks to form
alliances with third parties to reach market segments not currently employing
the Atlas System and to take advantage of their sales forces. The Company has
entered into a non-exclusive distribution agreement with SpaceLabs Medical, Inc.
and is also developing customized cardiac and obstetric versions of the Atlas
System, which will be distributed exclusively by Marquette Electronics, Inc. The
Company intends to pursue other alliances in order to broaden the distribution
of its systems.
SYSTEMS AND SERVICES
The initial version of the Company's CIM system, MedisGroups, was
introduced in 1987. In April 1994, the Company began replacing MedisGroups,
which was rapidly becoming obsolete, with a series of integrated modules
marketed as the Atlas System. Over the five-year period beginning in January
1991, revenues derived from MedisGroups declined as a result of both fewer unit
licenses and price reductions, reflecting, in part, the growing obsolescence of
that system. In April 1994, the Company released the first module of its Atlas
System. Over the two-year period ending April 1996, the Company released two
additional Atlas System modules, thereby fully replacing the MedisGroups system
and significantly expanding the capabilities of the Company's systems.
Concurrently, the Company began the process of converting existing MedisGroups
licenses to licenses for the Atlas System. The Company no longer directs any
efforts toward developing, licensing or supporting MedisGroups, because the
Company has successfully converted over 90% of MedisGroups users to the Atlas
System. Such former MedisGroups users have renewed Atlas System licenses at a
rate approximately equal to the Company's historical customer renewal rate.
25
<PAGE> 28
Atlas System Components
The Atlas System is a modular CIM system designed to enhance health care
value by performing quantitative analysis of patient data. The Atlas System
provides a comprehensive, cost-effective desktop solution to the problem of
generating sophisticated information from disparate raw data sources. The Atlas
System software is written in Microsoft FoxPro for Windows, Visual C++ and
Visual Basic. The Atlas System supports multiple, concurrent users in most
network environments with personal computers running Microsoft Windows and uses
Microsoft Excel to display results. The Atlas System is comprised of the major
components shown in the shaded area of the following diagram:
[ARTWORK]
[DESCRIPTION OF ARTWORK: Atlas System components shown in diagram form.]
26
<PAGE> 29
Atlas Repository and Atlas Glossary. The Atlas Repository electronically
interfaces with OLTP systems, enables the electronic capture of data from paper
medical records and selects relevant data for analysis from Atlas provider and
benchmarking databases. MediQual has developed the Atlas Glossary, a
comprehensive data dictionary and coding system that covers all aspects of
patient treatment, including lab tests, pharmaceuticals, vital signs, patient
history, radiology and clinician notes. The Atlas Glossary defines appropriate
time frames, ensures uniform collection and definition of terms, and excludes
irrelevant data. The Company believes that the Atlas Glossary is a significant
proprietary asset that is essential for the creation and standardization of
health care data for analysis. The Atlas Repository also includes Table
Maintenance, a tool for mapping provider-specific codes to Atlas Glossary codes,
thereby allowing benchmarking data to be cost-effectively developed from a wide
range of providers in geographically diverse locations.
Atlas Benchmarking Databases. Atlas users can access more than 40
specially formatted CD-ROM databases derived principally from the Company's
master database. These CD-ROM databases enable customers to benchmark by
provider location, size and specialty or by disease. MediQual's master database
is comprised of integrated clinical and administrative data derived from more
than 20 million patient encounters. MediQual routinely receives, as part of its
license agreements, a copy of provider-specific data which is standardized using
the Atlas Glossary and Table Maintenance in the Atlas Repository. This data
includes provider-specific UB-92 data, clinical OLTP data and data manually
abstracted from paper medical records.
Embedded Clinical Knowledge. The Atlas System contains clinical knowledge
that enables statistically valid conclusions to be reached from a comparison of
different patient populations. The breadth and depth of the Company's clinical
knowledge is largely attributable to the size and quality of the Company's
master database. More than 200 disease models, covering substantially all acute
conditions such as heart failure, stroke and pneumonia, were developed using
this master database and are embedded in the Atlas System in the form of
software algorithms. Disease models typically contain between 10 and 30
independent variables such as history of prior medical conditions, laboratory
test results, vital signs and physical exam findings. For example, the model
that predicts the probability of death for patients diagnosed with heart failure
contains thirty independent variables, including prior history of cancer,
presence of lethargy, use of mechanical vent, respiration rate, blood pressure
and creatinine level.
Atlas Provider Databases. The Company creates Atlas provider databases
specially formatted on CD-ROM by validating, classifying and scoring UB-92 data
from the federal government and approximately 20 states and from private data
sharing consortiums comprised of providers and payors. In addition, the Company
adds embedded clinical knowledge that is based on statistical models derived
from UB-92 data elements. This clinical knowledge enables the user to adjust for
the expected cost of treating differing combinations of diagnoses and
procedures. The Company has developed more than 125 Atlas provider databases.
On-Line Analytical Processing. The Atlas System provides on-line
analytical processing that enables real-time, drill-down and multi-dimensional
viewing of data contained in the Atlas Repository. The ability to change
perspective from summary to detail level and to add or delete selection criteria
is essential to the iterative analytical power of the Atlas System. The Atlas
System also offers advanced features such as filters, thresholds and built-in
statistics, which provide users with an ability to conduct customized data
analysis using more than 400 variables. These variables can be manipulated based
upon the analysis to be conducted and the particular database in use. For
example, the overall mortality rate for pneumonia patients can be (i) segmented
by age, gender and history of heart failure, (ii) filtered for specific
infecting organisms and (iii) refined with a minimum threshold to eliminate rare
occurrences. In this manner, users can test various hypotheses quickly using a
comprehensive iterative methodology.
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<PAGE> 30
Atlas System Modules
The Atlas System is comprised of three modules: Atlas Market View, Atlas
Resources and Atlas Outcomes. These modules are defined primarily by the type of
data they are designed to analyze. Atlas Market View analyzes Atlas provider
databases to enable competitive assessments of physicians and hospitals by name.
Atlas Resources and Atlas Outcomes analyze provider-specific patient encounter
data together with benchmarking databases derived from the Company's proprietary
master database. Atlas Outcomes encompasses all the functionality of Atlas
Resources, and adds certain clinical applications that address effectiveness,
efficiency and appropriateness. Atlas Outcomes includes optional disease and
peer group benchmarking databases and adds the ability to collect clinical data
from paper medical records. Clients may upgrade from Atlas Resources to Atlas
Outcomes at any time. Each module is packaged with at least one of the more than
150 different CD-ROM databases that the Company has developed. Each module (and
optional CD-ROM databases) contains application frameworks, called MQ Analyses
and also includes standard reports, called MQ Templates, which may be modified
by the user to build a custom library of reports and applications.
Atlas Market View provides competitive assessments of physicians and
hospitals by name on their relative efficiency, effectiveness and
appropriateness of care. These assessments include profiles of charges, lengths
of treatment, mortality and admission criteria. Atlas Market View analyzes
federal, state and private UB-92 data that has been specially prepared and
formatted on CD-ROM. This module contains embedded clinical knowledge, based on
statistical models derived from UB-92 data, that enables the user to adjust for
diverse patient populations under study, including differing combinations of
diagnoses and procedures. Atlas Market View also contains a benchmark for
overnight admission appropriateness, based on norms derived from MediQual's
master database.
Atlas Resources provides management assessments of the efficiency and
resource utilization of clinical processes and physicians. These assessments
include individual physician profiles, summaries of various patient populations
and extensive ad hoc analysis of the related underlying costs. Atlas Resources
analyzes downloaded OLTP data that has been specially prepared for the Atlas
Repository with a national benchmark derived from MediQual's master database.
This module shares the same embedded clinical knowledge that is contained in
Atlas Market View.
Atlas Outcomes, which expands the functionality of Atlas Resources by
incorporating additional databases and applications, is designed to provide
comprehensive internal assessments of clinical processes and providers. These
assessments include profiles of specific procedures, clinical summaries of
various patient populations and extensive ad hoc analysis of efficiency,
effectiveness and appropriateness. Atlas Outcomes combines provider data
downloaded from OLTP systems with data obtained directly from paper medical
records that has been specially prepared for the Atlas Repository and analyzes
such data against multiple disease and peer benchmarks derived from MediQual's
master database. This module contains additional embedded clinical knowledge,
based on statistical models derived from both UB-92 and clinical data elements,
that enables the user to adjust for differing combinations of diagnoses,
procedures, on-admission severity, length of stay, complications and other
factors.
Add-On Applications and Specialized Versions Under Development
Patient ROI. The Company is developing tools called rapid object
integrators to assist clients in integrating the Atlas System with their legacy
OLTP systems. Patient ROI, the first such tool, is designed to extend the
existing Atlas UB-92 interface for acute care patients to other patient
treatment sites, such as emergency rooms, ambulatory surgery centers,
rehabilitation facilities, psychiatric units and clinics. The Company plans to
release Patient ROI in the third quarter of 1996.
Physician BenchMark. Increasing pressure for lower costs has prompted
providers to develop more efficient practice patterns that reflect appropriate
levels of care and improved clinical performance. Physician BenchMark is a new
application that will enable providers to compare high volume
28
<PAGE> 31
efficient physicians to other physicians, identify and prioritize areas for cost
reduction and develop internal benchmarks. The Company plans to release
Physician BenchMark in 1997.
Physician Report Card. To remain competitive, providers increasingly need
to be differentiated based on cost and quality parameters. Physician Report Card
is a new application that will provide a statistical basis for making
credentialing and managed care decisions. The Company plans to release Physician
Report Card in 1997.
Atlas Specialized Versions. The Company is developing specialized versions
of Atlas modules and CD-ROM databases for use in cardiology and obstetrics. The
Company expects that these versions will be exclusively distributed by Marquette
Electronics, Inc. beginning in 1997. The Company is also modifying Atlas modules
for various regional data sharing consortiums comprised of providers and payors
who desire additional analytical or reporting features. The Company will release
the first of these additional specialized versions in 1997.
CIM Services
For providers, payors and suppliers who prefer a service solution to
address their information needs, MediQual provides analytic services for the
management of various diseases, data abstraction services and development of
custom databases. The Company has entered into an agreement with Ethicon
Endo-Surgery, Inc., a subsidiary of Johnson & Johnson, to provide analytical
services for the management of hysterectomies. These services involve linking
claims data to clinical records and include a comparison of different
hysterectomy surgical techniques, which allow providers and payors to evaluate
relative cost-effectiveness. Also, pursuant to an agreement with Merck & Co.,
Inc., the Company has developed analytical services for the management of
congestive heart failure. The Company intends to enter into similar arrangements
for other disease management applications. The Company also conducts custom
research for customers including Pfizer Inc. and Roche BioScience.
CUSTOMERS
The Company's customers include licensees of the Atlas System and
purchasers of CIM services. As of June 30, 1996, MediQual had licensed
approximately 450 Atlas modules, used by approximately 2,700 users. The Company
has relationships with approximately 400 customers. Approximately 84% of the
Company's customers have licensed only one module. The Company's customers
include:
ATLAS SYSTEM
Borgess Medical Center
Community Hospital of Central California
Florida Hospital Medical Center
Greater Cincinnati Community Health
Foundation
Hamot Medical Center
Iroquois Health Care Consortium
Sarah Bush Lincoln Health Center
Sisters of Charity Health Care Systems
Touro Infirmary
University of Massachusetts Medical
Center
University of Pittsburgh Medical Center
Washington Hospital
CIM SERVICES
Ethicon Endo-Surgery, Inc., a Johnson &
Johnson company
Merck & Co., Inc.
Pfizer Inc.
Roche BioScience
TRAINING AND SUPPORT
The Company believes that training and support are integral to the success
of its customers' use of the Atlas System. MediQual provides training at
customer sites, in regional seminars and at the
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<PAGE> 32
Company's computer-based training center. The Atlas System incorporates several
training and support features, including software tutorials, on-line help and
self-testing to certify that customers have reached acceptable levels of
proficiency. Dial-in support is available on the Company's electronic bulletin
board as well as World Wide Web site and telephone support is provided during
regular business hours. In addition, the Company produces an annual CIMposium
for Atlas users and prospective customers that offers a wide range of
educational sessions, research presentations, demonstration labs and workshops.
MARKETING AND DISTRIBUTION
MediQual markets its systems and services through a direct sales force of
10 people operating out of Massachusetts, Pennsylvania and New Jersey. Because
the decision to license the Company's systems frequently involves clinicians,
administrators and executives, the Company's senior management and clinical
support staff take an active role in marketing and sales activity. Corporate
marketing activities include seminars that showcase the Atlas System, trade show
exhibits and on-going support for the Company's World Wide Web site
(http://www.mediqual.com). The Company also markets its systems and services
through third party distribution arrangements.
The Company has entered into an agreement with Ethicon Endo-Surgery, Inc.,
a subsidiary of Johnson & Johnson, to provide analytical services for the
management of hysterectomies. These services involve linking claims data to
clinical records and include a comparison of different hysterectomy surgical
techniques, which allow providers and payors to evaluate relative cost-
effectiveness. Also, pursuant to an agreement with Merck & Co., Inc., the
Company has developed Atlas Services for the management of congestive heart
failure. The Company has entered into a non-exclusive distribution agreement
with SpaceLabs Medical, Inc. for the Atlas System and is also developing
customized cardiac and obstetric versions of the Atlas System for exclusive
distribution by Marquette Electronics, Inc.
RESEARCH AND DEVELOPMENT
Since 1993, the Company has invested approximately $11 million to develop
the Atlas System. In April 1996, the Company shifted its research and
development focus to enhancements and customized versions of the Atlas System.
Approximately 21 employees are involved in research and development.
COMPETITION
The market for health care information systems and services is intensely
competitive. Most of the Company's competitors and potential competitors have
significantly greater financial, technical, system development and marketing
resources than the Company. The Company competes directly with other vendors of
health care information and consultants who provide related services. MediQual
also competes with MIS departments of large hospital networks, some of which
have developed, or plan to develop, their own CIM capabilities. In addition,
potential competitors include OLTP vendors who may wish to build, rather than
buy, CIM technology. Many of these competitors and potential competitors have
substantial installed customer bases in the health care industry and the ability
to fund significant system development and acquisition efforts. The Company
believes that the principal competitive factors in its market are system
functionality and features, price, training and support, customer references and
firm reputation. The Company believes it competes favorably with respect to
these factors. Management seeks to differentiate the Company's systems from
those of its competitors by developing and maintaining technological advantages,
including the availability of the Company's large and expanding proprietary
database and the capability to perform sophisticated on-line analytical
processing, which contribute to the comprehensive nature of the Company's Atlas
System and the modular design of the Company's systems which permits the Company
to license additional databases and applications to existing customers.
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<PAGE> 33
GOVERNMENT REGULATION
The health care industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operation of
health care industry participants. During the past several years, the U.S.
health care industry has been subject to changes in governmental regulation of,
among other things, reimbursement rates and certain capital expenditures. Health
care industry participants may react to these proposals and the uncertainty
surrounding such proposals by curtailing or deferring investments, including
those for the Company's systems and services. Additionally, although the FDA
does not currently regulate the Company's systems or services, if authorized to
extend its regulation of software, the FDA could impose extensive requirements
that might negatively impact the time and expense necessary to develop new
systems. The Company cannot predict what impact, if any, such events might have
on its business, results of operations and financial condition. Further, many
health care providers are consolidating to create larger health care delivery
enterprises with greater regional market power. As a result, the remaining
enterprises could have greater bargaining power, which may lead to price erosion
of the Company's systems and services.
INTELLECTUAL PROPERTY
MediQual considers its software, databases, disease models and
methodologies to be proprietary. The Company seeks to protect its intellectual
property through confidentiality agreements with its employees and consultants,
and through nondisclosure agreements with its strategic partners. The Company
also relies on a combination of physical security, trade secrets, technical
measures, copyright law and contractual provisions to protect its rights in
various methodologies, systems, databases and documentation. The Company has not
filed any patent applications or copyrights covering its software technology.
There can be no assurance that the legal protections afforded to the Company or
the precautions taken will be adequate to prevent misappropriation of the
Company's intellectual property in the future. Any infringement or
misappropriation of the Company's proprietary software and databases would
disadvantage the Company in efforts to retain and attract customers and could
cause the Company to incur revenue losses or substantial litigation expenses.
Due to the evolving nature of its systems and services, the Company believes
that the protective measures described above are less significant than the
Company's ability to continually develop, modify and enhance its intellectual
property. Although the Company believes that its current systems do not infringe
on the intellectual property rights of others, there can be no assurance that
such a claim will not be asserted against the Company in the future.
EMPLOYEES
As of June 30, 1996, the Company had 66 employees, including 57 full-time
and nine part-time employees. None of these employees is represented by a union
or other collective bargaining group. The Company believes that its relationship
with its employees is good. The Company engages independent contractors for
certain development and data warehousing projects.
FACILITIES
The Company's corporate offices are located in a 24,500 square foot office
facility at 1900 West Park Drive, Westborough, Massachusetts 01581 under a lease
that expires on March 31, 1999. The Company believes that its facilities are
adequate for its current operations.
LEGAL PROCEEDINGS
The Company is not a party to any pending litigation.
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<PAGE> 34
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------- --- ------------------------------------------------
<S> <C> <C>
Eric A. Kriss........................... 47 President, Chief Executive Officer and Director
William C. Price........................ 36 Vice President and Chief Financial Officer
Elizabeth A. Endyke..................... 35 Vice President of Marketing and Distribution
Diane M. Throop......................... 34 Vice President of Research and Development
James Corum............................. 55 Vice President of Information Systems
William D. Ryan(1)(2)................... 70 Chairman of the Board of Directors
Alan C. Brewster, MD.................... 58 Director
David Dominik(1)(2)..................... 39 Director
Charles M. Jacobs....................... 63 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Mr. Kriss has served as President, Chief Executive Officer and Director of
the Company since March 1993. From January 1991 until joining MediQual, Mr.
Kriss served as Assistant Secretary for Administration & Finance under Governor
William Weld of Massachusetts. In January 1984, Mr. Kriss founded MediVision,
Inc., an ambulatory surgery center network, where he served as CEO until
December 1989. Previously, Mr. Kriss was a partner at Bain & Company, a
strategic consulting firm and, subsequently, a partner at Bain Capital, Inc., an
investment partnership. Mr. Kriss also serves as a director of Physician
Reliance Network, Inc., a physician practice management company specializing in
oncology. Mr. Kriss holds an MBA from the University of Chicago and a BA from
Amherst College.
Mr. Price joined the Company in December 1991 and has served as Chief
Financial Officer since November 1992. From 1982 to December 1991, Mr. Price was
employed by the independent public accounting firm of Arthur Andersen LLP where
he served as a manager in both the firm's commercial and small business
divisions. Previously, he managed financial matters for Codex Corporation, a
subsidiary of Motorola, Inc., and Children's Hospital of Boston. Mr. Price is a
Certified Public Accountant and holds a BS from Northeastern University.
Ms. Endyke, Vice President of Marketing and Distribution of the Company,
joined the Company in September 1993. Prior to joining the Company, Ms. Endyke
was Director of Marketing at Elan Pharma, Inc, a manufacturer and distributor of
pharmaceutical products. From 1986 to 1991, she was Director of Marketing at
MediVision, Inc. Ms. Endyke holds an MBA from Babson College and a BA from
Assumption College.
Ms. Throop, Vice President of Research and Development of the Company,
joined the Company in 1987 as Chief Statistician, and assumed responsibility for
research and development in 1994. Previously, Ms. Throop was employed by Data
General Corporation. She holds a MS in statistics from Colorado State University
and a BS from the Massachusetts Institute of Technology.
Mr. Corum, Vice President of Information Systems of the Company, joined the
Company in June 1993. Prior to joining MediQual, Mr. Corum held various
positions with the Commonwealth of Massachusetts Office of Management
Information Systems, most recently serving as its director. Previously, he was
the Assistant Commissioner for Administration and Finance for the Massachusetts
Department of Public Health. Mr. Corum holds masters degrees in linguistics and
philosophy from the Massachusetts Institute of Technology and a BA from Harvard
University.
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<PAGE> 35
Mr. Ryan has served as Chairman of the Board, and as a Director of the
Company, since its inception. Mr. Ryan, a retired executive and a private
investor, is currently a Trustee of the University of Rochester and serves as a
director of several non-profit organizations.
Dr. Brewster, a co-founder of the Company, has been a Director since its
inception. Dr. Brewster is an independent health care consultant.
Mr. Dominik has been a Director of the Company since April 1993. He has
been a General Partner of Information Partners, L.P., a venture capital
investment firm headquartered in Boston, since January 1990 and Managing
Director of Information Partners, Inc. since June 1993. In addition, he has been
Managing Director of Bain Capital, an investment partnership, since June 1993.
Mr. Dominik also serves as a director of Oacis Healthcare Holdings Corp.,
Dataware Technologies, Inc. and several privately held companies.
Mr. Jacobs, a co-founder of the Company, has been a Director since 1982.
Mr. Jacobs has been the Chairman and Chief Executive Officer of InterQual, Inc.,
a developer of health care utilization criteria and systems since 1976. Mr.
Jacobs is also a practicing attorney.
Executive officers of the Company are appointed by the Board of Directors
on an annual basis and serve until their successors have been duly elected and
qualified. There are no family relationships among any of the executive officers
or Directors of the Company. Each Director is elected by the stockholders of the
Company on an annual basis and holds office for a one-year term and until that
Director's successor has been duly elected and qualified. Directors who are not
employed by the Company are reimbursed for expenses actually incurred in
connection with their attendance at such meetings.
EMPLOYMENT AGREEMENTS
In March 1993, the Company entered into an Executive Employment Agreement
with Mr. Kriss pursuant to which, as such agreement has been amended to date,
Mr. Kriss will receive a base salary of $202,600 for 1996 and will be eligible
to earn a cash bonus upon the achievement of certain objectives negotiated
annually. The agreement further provides that the Company will nominate Mr.
Kriss for election as a director on each occasion during the term of the
agreement when directors are to be elected. The agreement is terminable by the
Company's Board of Directors or by Mr. Kriss at any time. In the event that Mr.
Kriss' employment is terminated by the Company without cause or by Mr. Kriss for
good reason, Mr. Kriss will continue to receive all compensation and benefits
provided under the agreement for six months and any stock options and restricted
stock in the Company held by Mr. Kriss will become immediately exercisable and
vest.
In 1995, the Board of Directors of the Company concluded that it would be
in the best interests of the Company to encourage the executive officers of the
Company to remain with the Company in order to ensure the successful completion
of the development and commercialization of the Atlas System. Accordingly, in
July 1995, the Company entered into a Stay Agreement with each of Mr. Price, Ms.
Endyke, Mr. Corum and Ms. Throop. Under the Stay Agreements, the Company
guaranteed each officer a severance payment in an amount equal to such officer's
twelve-month base salary in the event that the officer's employment is
terminated other than at such officer's volition. Pursuant to the Stay
Agreements, all stock options granted prior to the execution of the Stay
Agreements to the officers under the Company's 1987 Nonqualified Stock Option
Plan immediately vested on January 3, 1996.
In January 1996, the Company entered into an agreement with Mr. Kriss,
which provided for the issuance of a promissory note for $75,000, in lieu of the
payment of Mr. Kriss' 1995 bonus in cash, which accrues interest at a rate of
10% per year (which represented the Company's then current external cost of
capital) and is payable by January 2, 1998. Under the agreement, Mr. Kriss is
eligible to receive a cash bonus of up to $200,000 and was granted an option to
purchase up to 225,000 shares of Common Stock at a price of $1.00 per share, the
then fair market value of the Common Stock. Any shares of Common Stock purchased
upon exercise of the option are subject to a right of repurchase by the Company,
which right lapses on the fifth anniversary of the date of grant. A portion of
the cash bonus will become payable, and some or all of the shares covered by the
option will no longer be subject to
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<PAGE> 36
repurchase by the Company, in the event of a sale of at least 50% of the Company
or the closing of an initial public offering, in each case depending on a
valuation of the Company in excess of certain predetermined amounts. In the
event that the Offering results in a valuation of the Company, determined by
multiplying the number of shares outstanding after the Offering by the initial
public offering price per share, in excess of $25,000,000, Mr. Kriss will be
eligible to receive the entire bonus and none of the shares of Common Stock
underlying the option shall be subject to repurchase by the Company. Mr. Kriss
exercised this option in full on March 29, 1996. Under the agreement, in order
to induce Mr. Kriss to remain as an officer and director at least until January
1998, the Company agreed to cancel a note receivable for $201,523 from Mr. Kriss
upon the closing of a transaction based upon a valuation of the Company in
excess of $16,000,000.
EXECUTIVE COMPENSATION
Compensation Summary
The following table sets forth certain information regarding the Company's
Chief Executive Officer and each of the other four most highly compensated
executive officers during the calendar year ended December 31, 1995 (the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
-------------------
ANNUAL COMPENSATION SECURITIES
-------------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY ($) BONUS(1)($) OPTIONS (#)
- ------------------------------------------------ ---------- ----------- -------------------
<S> <C> <C> <C>
Eric A. Kriss................................... 202,600 75,000(2) 0
President and Chief Executive Officer
William C. Price................................ 98,000 14,357(3) 7,200
Vice President and Chief Financial Officer
Elizabeth A. Endyke............................. 87,000 22,886(3) 12,500
Vice President of Marketing
Diane M. Throop................................. 87,000 24,750(3) 5,000
Vice President of Research and Development
James Corum..................................... 85,500 19,271(3) 12,500
Vice President of Information Systems
</TABLE>
- ---------------
(1) Includes bonuses earned in 1995 but paid in 1996, and excludes bonuses paid
in 1995 for services rendered in 1994.
(2) Mr. Kriss agreed to accept his 1995 bonus in the form of a promissory note
in the principal amount of $75,000 (accruing interest at an annual interest
rate of 10%), in lieu of payment in cash.
(3) Includes the value of 8,357, 1,785, 750 and 3,571 shares of Common Stock
issued in March 1996 to Mr. Price, Ms. Endyke, Ms. Throop and Mr. Corum,
respectively, valued at fair market value.
Other than cash compensation and compensation pursuant to employee benefit
plans, no executive officer received other compensation in excess of the lesser
of $25,000 or 10% of such officer's cash compensation, nor did all executive
officers as a group receive additional compensation in excess of the lesser of
$100,000 or 10% of such officers' aggregate cash compensation.
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<PAGE> 37
Option Grants in 1995
The following table contains information concerning the grant of stock
options under the Company's 1987 Nonqualified Stock Option Plan to the Named
Executive Officers during the year ended December 31, 1995:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE
------------------------------------------------------------ VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SHARES PERCENT OF STOCK PRICE
UNDERLYING TOTAL OPTIONS APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM(2)
GRANTED EMPLOYEES IN PRICE EXPIRATION ------------------
NAME (#) FISCAL 1995 ($/SHARE)(1) DATE 5% 10%
- ---------------------- ---------- --------------- ------------ ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Eric A. Kriss......... -- -- -- -- -- --
William C. Price...... 7,200 9% $ 1.00 7/12/05 $4,528 $11,475
Elizabeth A. Endyke... 12,500 16% $ 1.00 7/12/05 $7,861 $19,922
Diane M. Throop....... 5,000 6% $ 1.00 7/12/05 $3,145 $ 7,969
James Corum........... 12,500 16% $ 1.00 7/12/05 $7,861 $19,922
</TABLE>
- ---------------
(1) All options were granted at fair market value as determined by the Board of
Directors of the Company on the date of the grant. Options become
exercisable ratably over a 50-month period.
(2) This column shows the hypothetical gains or "option spreads" of the options
granted based on both the fair market value of the Common Stock for
financial reporting purposes and assumed annual compound stock appreciation
rates of 5% and 10% over the term of the options. The 5% and 10% assumed
rates of appreciation are mandated by the rules of the Securities and
Exchange Commission and do not represent the Company's estimate or
projection of future Common Stock prices. The gains shown are net of the
option exercise price, but do not include deductions for taxes or other
expenses associated with the exercise of the option or the sale of the
underlying shares. The actual gains, if any, on the exercises of stock
options will depend on the future performance of the Common Stock. The
assumed annual rates of stock price appreciation result in a value per share
that is significantly below the proposed public offering price range, due to
the recent significant increase in the value of the Common Stock. The
potential realizable value of the options, at an initial public offering
price of $10.00 per share and annual rates of stock price appreciation of 5%
and 10% from the date of grant through the expiration date of the options,
would be as follows: Mr. Price, $110,080 and $179,549, respectively, Ms.
Endyke, $191,112 and $311,718, respectively, Ms. Throop, $76,445 and
$121,687, respectively, and Mr. Corum, $191,112 and $311,718, respectively.
The above table does not include an option to purchase 225,000 shares of
Common Stock at an exercise price of $1.00 per share granted to Mr. Kriss on
January 2, 1996, which option was exercisable in full on the grant date. Shares
of Common Stock issued upon exercise of the option are subject to repurchase by
the Company, at $1.00 per share prior to January 2, 1998 or the closing of the
earlier of either a sale of the Company or a public offering above certain
minimum thresholds. In January 1996, the Company granted options to purchase
18,750, 6,250, 18,750 and 3,750 shares of Common Stock to Mr. Price. Ms. Endyke,
Ms. Throop and Mr. Corum, respectively, at the option exercise price of $1.00
per share. In June 1996, the Company granted options to purchase 30,000, 3,250
and 10,000 shares of Common Stock to Mr. Price, Ms. Endyke and Mr. Corum,
respectively, at an exercise price of $9.00 per share.
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<PAGE> 38
Option Exercises and Year-End Values
Stock options exercised by the Named Executive Officers during the year
ended December 31, 1995 are set forth in the following table. The following
table also sets forth certain information regarding unexercised options held by
each of the Named Executive Officers as of December 31, 1995:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
AGGREGATE FISCAL YEAR-END OPTION VALUES
---------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
YEAR-END(#) AT FISCAL YEAR-END($)(1)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Eric A. Kriss.......... -- -- -- -- -- --
William C. Price....... -- -- 5,025 3,425 45,225 30,825
Elizabeth A. Endyke.... -- -- 6,150 6,350 55,350 57,150
Diane M. Throop........ -- -- 9,850 2,650 88,650 23,850
James Corum............ -- -- 6,550 5,950 58,950 53,550
</TABLE>
- ---------------
(1) The exercise price per share of each option is $1.00, the fair market value
per share of the Common Stock at December 31, 1995. In order to present
meaningful information, these values have been calculated based on the
assumed initial public offering price of $10.00 per share, less the exercise
price per share.
On March 29, 1996, the Company issued 225,000 shares of Common Stock to Mr.
Kriss upon the exercise of an option granted pursuant to an incentive
arrangement at an exercise price of $1.00 per share.
EMPLOYEE BONUS PROGRAM
The Company has an incentive compensation program that provides for the
annual award of cash bonuses to employees based on individual and Company
performances.
STOCK OPTION PLANS
1987 Nonqualified Stock Option Plan
In May 1987, the shareholders of the Company approved the Company's 1987
Nonqualified Stock Option Plan (the "1987 Plan"), which provides for the grant
of stock options to employees, consultants and directors of the Company
(including officers and employee directors). In May 1996, the Company's Board of
Directors adopted a resolution to terminate the 1987 Plan with respect to the
grant of new options thereunder. Outstanding options granted under the 1987 Plan
continue to be governed by the terms of the 1987 Plan, as amended, and remain
exercisable in accordance with their respective terms.
The 1987 Plan, as amended, is administered by the Compensation Committee of
the Board of Directors, which has the authority to determine the time, manner
and form of payment upon exercise of an option. Options that have been granted
under the 1987 Plan become exercisable at such time or times as were determined
by the Compensation Committee or the Board of Directors at the time they were
granted and expire after a specified period that may not exceed ten years from
the date of grant. The 1987 Plan provides that options must be exercised no more
than three months following termination of employment or service as a consultant
or director, except in the event that termination is due to death or disability,
in which case the option is exercisable for a maximum of twelve months after
such termination.
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<PAGE> 39
In the event the Company is acquired by merger, consolidation or purchase
of assets or if the Company dissolves or becomes liquidated, (i) all unexercised
options granted under the 1987 Plan that by their terms would become exercisable
on or before the ninetieth day after the earlier of the date on which the
Company enters into an agreement for, or the closing of, such a merger,
consolidation or sale or the Company's adoption of a plan of dissolution or
liquidation, and (ii) fifty percent of all remaining options granted under the
1987 Plan that would otherwise become exercisable after such ninetieth day, will
become immediately exercisable.
As of June 30, 1996, 486,196 shares of Common Stock had been issued upon
the exercise of options granted under the 1987 Plan, and options to purchase an
additional 337,292 shares were outstanding (of which 171,546 were exercisable
within 60 days of June 30, 1996). Options were granted pursuant to the 1987 Plan
at exercise prices ranging from $1.00 to $4.60, all of which were repriced to
$1.00.
1996 Stock Incentive Plan
In May 1996, the Company's Board of Directors and stockholders approved the
Company's 1996 Stock Incentive Plan (the "1996 Plan"), which provides for the
grant of incentive stock options, nonqualified stock options and restricted
stock awards to employees of the Company (including officers and employee
directors). A maximum of 1,500,000 shares are currently reserved for issuance
pursuant to the 1996 Plan. This maximum number of shares will increase,
effective as of January 1, 1998 and each January 1 thereafter during the term of
the plan, by an additional number of shares of Common Stock equal to ten percent
of the difference between (i) the total number of shares of Common Stock and
Common Stock equivalents issued and outstanding as of the close of business on
December 31 of the preceding year and (ii) the total number of shares of Common
Stock and Common Stock equivalents issued and outstanding as of the close of
business on December 31 of the year prior to such preceding year. No participant
in the 1996 Plan may in any year be granted stock options or awards with respect
to more than 500,000 shares of Common Stock, and no more than an aggregate of
3,000,000 shares of Common Stock may be issued pursuant to the exercise of
incentive stock options granted under the 1996 Plan. As of June 30, 1996, 53,500
options had been granted under the 1996 Plan, of which 18,250 were exercisable.
The 1996 Plan is administered by the Compensation Committee of the Board of
Directors, which has the authority to determine which eligible individuals are
to receive options or restricted stock awards, the terms of such options or
awards, including the number of shares, exercise or purchase prices and times at
which the options become and remain exercisable or restricted stock vests, the
time, manner and form of payment upon exercise of an option and the status of
options as incentive or nonqualified stock options under federal income tax
laws. The exercise price of options granted under the 1996 Plan may not be less
than 85% of the fair market value of a share of Common Stock on the date of
grant (100% in the case of incentive stock options). The options become
exercisable at such time or times as are determined by the Compensation
Committee and expire after a specified period that may not exceed ten years.
Options must be exercised no more than three months following termination of
employment, except in the event that termination is due to death or disability,
in which case the option is exercisable for a maximum of twelve months after
such termination.
Each option granted to an officer of the Company, subject to the
short-swing profit restrictions of the Federal securities laws, may provide, and
each outstanding option to an officer as of the date of this Prospectus does
provide, that upon the acquisition of 50% or more of the outstanding Common
Stock pursuant to a hostile tender offer, such option, if outstanding for at
least six months, will automatically be canceled in exchange for a cash
distribution to the officer based upon the difference between the tender offer
price and the exercise price of the option.
In the event the Company is acquired by merger, consolidation or purchase
of assets, all outstanding options granted under the 1996 Plan will accelerate
to the extent not assumed by the acquiring entity or replaced by comparable
options. The Compensation Committee also has discretion to provide for the
acceleration of one or more outstanding options under the 1996 Plan and the
vesting
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<PAGE> 40
of unvested shares held as restricted stock awards upon the occurrence of
certain changes in control. Such accelerated vesting may be conditioned upon
subsequent termination of the affected optionee's service.
The Compensation Committee has the authority to effect, from time to time,
the cancellation of outstanding options under the 1996 Plan in return for the
grant of new options for the same or a different number of option shares with an
exercise price per share based upon the fair market value of the Common Stock on
the new grant date.
The Board may amend or modify the 1996 Plan at any time subject to the
rights of holders of outstanding options on the date of amendment or
modification. Stockholder approval is required for any amendment that would
change the eligibility requirements of the 1996 Plan, extend the term of the
1996 Plan or increase the number of shares subject to grant as options or
restricted stock awards under the 1996 Plan. The 1996 Plan will terminate on May
28, 2006.
1996 Employee Stock Purchase Plan
In May 1996, the Company's Board of Directors and stockholders approved the
1996 Employee Stock Purchase Plan (the "Stock Purchase Plan"), which enables
eligible employees to acquire shares of the Company's Common Stock through
payroll deductions. The Stock Purchase Plan is intended to qualify as an
"employee stock purchase plan" under Section 423 of the Internal Revenue Code of
1986, as amended. Offerings under the Stock Purchase Plan are planned to
commence on February 1 and August 1 of each year and to end on July 31 and
January 31 of each year. The initial offering period is intended to commence on
the effective date of the registration statement relating to this Offering and
to end on January 31, 1997, unless otherwise determined by the Board. During
this offering period, an eligible employee may select a rate of payroll
deduction of up to 15% of his or her compensation up to an aggregate total
payroll deduction not to exceed $12,500 in any offering period. The purchase
price for the Common Stock purchased under the Stock Purchase Plan is 85% of the
lesser of the fair market value of the shares on the first day or the last day
of the offering period. A total of 300,000 shares of Common Stock have been
reserved for issuance under the Stock Purchase Plan.
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<PAGE> 41
CERTAIN TRANSACTIONS
CERTAIN TRANSACTIONS
At the closing of this offering, William D. Ryan, a director of the
Company, and an entity related to Mr. Ryan will receive cash proceeds of
$3,569,083 from the mandatory redemption by the Company of all of the
outstanding shares of its Class A Preferred Stock, at a redemption price of
$10,000 per share plus accrued dividends of approximately $5,586 per share
(assuming redemption as of June 30, 1996), representing an annual rate of return
of 10%.
The Company has entered into certain employment and other agreements with
Eric A. Kriss, the President and Chief Executive Officer of the Company,
providing for the payment of salary and bonuses, the grant of stock options and
related matters. See "Management -- Employment Agreements."
In March 1993, Mr. Kriss issued a promissory note to the Company in the
aggregate principal amount of $201,523 (the "Note"). The Note, which is recourse
to Mr. Kriss and is also secured by certain shares of the Company's Common Stock
held by Mr. Kriss, bears interest at an annual rate of 3.92% (the short-term
federal interest rate in effect on the date the Note was issued) and became
payable on March 29, 1996, however the Company has not chosen to collect such
amount to date. In accordance with the terms of a letter agreement between the
Company and Mr. Kriss entered into in January 1996, the Note will be cancelled
upon the closing of a public offering of the Company's Common Stock based on a
valuation of the Company equal to or in excess of $16,000,000. Under the
agreement, in order to induce Mr. Kriss to remain as an officer and director at
least until January 1998, the Company agreed to cancel the Note upon the closing
of a transaction based upon a valuation of the Company in excess of $16,000,000.
In addition, in January 1996, the Company issued Mr. Kriss a note for $75,000 in
lieu of Mr. Kriss' 1995 cash bonus, which accrues interest at a rate of 10% per
year (which represented the Company's then current external cost of capital) and
is payable by January 2, 1998. See "Management -- Employment Agreements."
OTHER RELATIONSHIPS
David Dominik, a director of the Company, is a general partner of
Information Partners Capital Fund, L.P. and entities related thereto, which
collectively own greater than 5% of the Common Stock.
The Company has a policy that all transactions between the Company and its
officers, directors and affiliates must be on terms no less favorable than those
that could be obtained from unrelated third parties, and must be approved by a
majority of the disinterested members of the Company's Board of Directors.
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<PAGE> 42
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of the Common Stock
as of June 30, 1996, and as adjusted to reflect the sale of 2,200,000 shares of
Common Stock offered hereby, by (i) each person or entity known to the Company
to beneficially own 5% or more of the outstanding shares of Common Stock, (ii)
each of the Company's directors, (iii) each of the Company's Named Executive
Officers and (iv) all directors and executive officers of the Company as a
group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------------------------
PRIOR TO OFFERING(1) AFTER OFFERING(1)
--------------------- -----------------
NUMBER PERCENT PERCENT
--------- ------- -----------------
<S> <C> <C> <C>
5% Stockholders
TA Associates(2)....................................... 1,139,934 18.5% 13.6%
125 High Street
Boston, MA 02110
David Dominik(3)....................................... 1,054,774 17.4% 12.8%
Information Partners, L.P.(4).......................... 1,054,774 17.4% 12.8%
2 Copley Place
Boston, MA 02116
William Ryan(5)........................................ 855,833 14.1% 10.4%
2 Woodbury Place
Rochester, NY 14618
Eric A. Kriss(6)....................................... 551,904 9.1% 6.7%
c/o MediQual Systems, Inc.
1900 West Park Drive
Westborough, MA 01581
Charles M. Jacobs(7)................................... 543,152 9.0% 6.6%
c/o InterQual, Inc.
293 Boston Post Road
Marlborough, MA 01752
Other Directors and Named Executive Officers
Alan C. Brewster, M.D.(8).............................. 112,500 1.9% 1.4%
William C. Price(9).................................... 32,421 * *
James Corum(10)........................................ 16,997 * *
Elizabeth A. Endyke(11)................................ 18,950 * *
Diane M. Throop(12).................................... 15,875 * *
All Directors and executive officers as a group
(9 persons)(13)...................................... 3,202,406 52.3% 38.4%
</TABLE>
- ---------------
* Denotes less than one percent (1%)
(1) The number of shares of Common Stock deemed outstanding prior to this
offering includes (i) 3,880,776 shares of Common Stock outstanding as of
June 30, 1996 and (ii) an aggregate of 2,183,530 shares of Common Stock
issuable upon the conversion of the Class B and Class C Convertible
Preferred Stock. The number of shares outstanding after this offering
includes the 2,200,000 shares of Common Stock offered hereby.
(2) Consists of an aggregate of 1,036,552 shares of Common Stock and
immediately exercisable warrants to acquire 103,382 shares of Common Stock
held by the following entities related to TA Associates (shares/warrants):
Advent V Limited Partnership (609,664/60,806); Advent Atlantic & Pacific
Limited Partnership (291,775/29,101); Advent Industrial Limited Partnership
(97,258/9,700); TA Associates V Limited Partnership (23,402/2,334); and TA
Venture Investors (14,453/1,441).
(3) Consists of an aggregate of 1,054,774 shares of Common Stock held by
Information Partners Capital Fund, L.P. and certain related entities. Mr.
Dominik is a general partner of Information Partners Capital Fund, L.P.
and, as such, may be deemed to beneficially own all such shares.
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<PAGE> 43
Mr. Dominik disclaims beneficial ownership of such shares, except to the
extent of his proportionate pecuniary interest therein. The address of Mr.
Dominik is c/o Information Partners, L.P., 2 Copley Place, Boston,
Massachusetts 02116.
(4) Includes an aggregate of 962,947 shares of Common Stock held by the
following entities related to Information Partners, L.P.; Information
Partners Capital Fund, L.P. (975,689); BCIP Trust Associates, L.P. (42,012)
and BCIP Associates (37,073). Does not include options of Information
Partners Capital Fund, L.P. to purchase 50,000 and 75,027 shares of Common
Stock held by Dr. Brewster and Mr. Jacobs, respectively, pursuant to option
agreements between Information Partners Capital Fund, L.P. and each of Dr.
Brewster and Mr. Jacobs.
(5) Includes 557,500 shares of Common Stock held by NAYR Enterprises, a limited
partnership of which Mr. Ryan is a general partner. Mr. Ryan disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest therein.
(6) Includes 12,500 shares of Common Stock held in trust for Mr. Kriss' minor
children. Mr. Kriss disclaims beneficial ownership of such shares.
(7) Includes 61,875 shares of Common Stock held by Mr. Jacob's wife, 65,000
shares held in trust for Mr. Jacobs' children and 75,027 shares of Common
Stock held by InterQual, Inc., a corporation of which Mr. Jacobs is the
majority shareholder. Also includes 75,027 shares of Common Stock subject
to transfer to Information Partners Capital Fund, L.P. pursuant to an
option agreement between the parties. Mr. Jacobs disclaims beneficial
ownership of the shares held by his wife and held in trust for his
children. Mr. Jacobs also disclaims beneficial ownership of the shares held
by InterQual, Inc., except to the extent of his pecuniary interest therein.
(8) Includes 50,000 shares of Common Stock subject to transfer to Information
Partners Capital Fund, L.P. pursuant to an option agreement between the
parties.
(9) Includes 19,475 shares issuable pursuant to options exercisable within 60
days after June 30, 1996.
(10) Includes 13,425 shares issuable pursuant to options exercisable within 60
days after June 30, 1996.
(11) Includes 16,625 shares issuable pursuant to options exercisable within 60
days after June 30, 1996.
(12) Includes 15,125 shares issuable pursuant to options exercisable within 60
days after June 30, 1996.
(13) Includes 64,650 shares issuable pursuant to options exercisable within 60
days after June 30, 1996.
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<PAGE> 44
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000 shares
of Common Stock, par value $.001 per share, and 7,000,000 shares of Preferred
Stock, par value $.01 per share.
COMMON STOCK
As of June 30, 1996, there were 6,064,306 shares of Common Stock
outstanding and held of record by 145 stockholders, after giving effect to the
conversion of all outstanding shares of Series B Preferred Stock and Series C
Preferred Stock upon the closing of the Offering. Based upon the number of
shares of Common Stock outstanding as of that date and giving effect to the
issuance of the 2,200,000 shares of Common Stock offered hereby (assuming no
exercise of the underwriters' over-allotment option), there will be 8,264,306
shares of Common Stock outstanding upon the closing of the Offering.
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to receive ratably the net
assets of the Company available after the payment of all debts and other
liabilities, subject to the prior rights of any outstanding Preferred Stock.
Holders of the Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered by the Company in the Offering will be, when issued and paid for, fully
paid and nonassessable. The rights, preferences and privileges of holders of
Common Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of Preferred Stock that the Company may
designate and issue in the future. Upon the closing of the Offering, there will
be no shares of Preferred Stock outstanding.
In addition, certain of the Company's stockholders hold warrants to
purchase an aggregate of 156,918 shares of Common Stock at an exercise price of
$.80 per share (such number of shares and exercise price being subject to
adjustment upon the occurrence of any consolidation or merger involving the
Company or in the event of any reclassification, subdivision or combination of,
or dividend with respect to, the Common Stock). Such warrants were issued by the
Company in April 1993 and can be exercised, in whole or in part, at any time
prior to their expiration in April 2003 by payment of the exercise price
therefor, by delivery of shares of Common Stock with a fair market value equal
to such exercise price or by net exercise.
PREFERRED STOCK
The Board of Directors is authorized, subject to certain limitations
prescribed by law, without further stockholder approval, from time to time to
issue up to an aggregate of 7,000,000 shares of Preferred Stock in one or more
series and to fix or alter the designations, preferences and rights, and any
qualifications, limitations or restrictions thereof, of the shares of each such
series, including the number of shares constituting any such series and the
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption (including sinking fund provisions), redemption price or prices and
liquidation preferences thereof. The issuance of any such Preferred Stock may
have the effect of delaying, deferring or preventing a change of control of the
Company. The Company has no present plans to issue any such shares of Preferred
Stock.
OUTSTANDING REGISTRATION RIGHTS
The Company is party to a Registration Rights Agreement, dated as of April
27, 1993 (the "Registration Agreement"), with certain of its stockholders,
including certain affiliates of directors of the Company (the "Registration
Stockholders"), who collectively hold approximately 2,183,530 shares of Common
Stock and warrants to purchase an additional 156,918 shares of Common Stock
(collectively, the "Registrable Shares") as of June 30, 1996. Pursuant to the
Registration Agreement, the Company has agreed, in the event the Company
proposes to register any of its securities under the
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<PAGE> 45
Securities Act in connection with a public offering of such securities for cash,
whether for its own account or otherwise at any time, to provide such
Registration Stockholders or their permitted transferees with notice of such
registration and an opportunity to include the Registrable Shares therein,
subject to certain conditions and limitations ("piggyback registration"). In
addition, the holders of fifty percent or more of one of two classes of
Registrable Shares may on up to two occasions, subject to certain conditions and
limitations, require the Company, whether or not the Company proposes to
register its Common Stock for sale, to register all or part of their Registrable
Shares for sale to the public under the Securities Act. The Registration
Stockholders may also require the Company to register all or part of their
Registrable Shares on Form S-3 under the Securities Act, or any similar form, if
the Company then qualifies for use of such form, subject to certain conditions
and limitations. The Company is obligated to pay all the expenses (other than
underwriting discounts) for each registration of Common Stock undertaken
pursuant to the Registration Agreement. Holders of a majority of each class of
the Registrable Shares required to effect a waiver of their rights to have their
Registrable Shares included in the registration statement of which this
Prospectus is a part have waived such rights to participate in this Offering. An
aggregate of 2,340,448 Registrable Shares will remain outstanding after this
Offering. Additionally, a former product development partner of the Company and
one of its affiliates have piggyback registration rights with respect to an
aggregate of 173,638 shares of Common Stock issued upon exercise of an option
and conversion of a debenture, each of which were issued by the Company in 1991
in connection with the settlement of a dispute between the parties. These
registration rights are not exercisable in connection with this Offering.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "DGCL"). Subject to certain exceptions, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the interested stockholder attained such status with the
approval of the Board of Directors or unless the business combination is
approved in a prescribed manner. A "business combination" includes certain
mergers, asset sales and other transactions resulting in a financial benefit to
the interested stockholder. Subject to certain exceptions, an "interested
stockholder" is a person who, together with his or her affiliates and
associates, owns, or owned within three years prior, 15% or more of the
corporation's voting stock.
The Company's Amended and Restated By-Laws (the "By-Laws") provide that for
nominations for the Board of Directors or for other business to be properly
brought by a stockholder before a meeting of stockholders, the stockholder must
first have given timely notice thereof in writing to the Secretary of the
Company. To be timely, a notice of nominations or other business to be brought
before an annual meeting must be delivered not less than 120 days nor more than
150 days prior to the first anniversary of the date of the proxy statement
delivered to stockholders in connection with the preceding year's annual meeting
or, if the date of the annual meeting is more than 30 days before or more than
60 days after such anniversary, or if no proxy statement was delivered to
stockholders in connection with the preceding year's annual meeting, such notice
must be delivered not earlier than 90 days prior to such annual meeting and not
later than the later of (i) 60 days prior to the annual meeting or (ii) 10 days
following the date on which public announcement of the date of such annual
meeting is first made by the Company. With respect to special meetings, notice
must generally be delivered not more than 90 days prior to such meeting and not
later than the later of 60 days prior to such meeting or 10 days following the
day on which public announcement of such meeting is first made by the Company.
The notice must contain, among other things, certain information about the
stockholder delivering the notice and, as applicable, background information
about each nominee or a description of the proposed business to be brought
before the meeting.
The Company's Amended and Restated Certificate of Incorporation (the
"Charter") empowers the Board of Directors, when considering a tender offer or
merger or acquisition proposal, to take into account factors in addition to
potential economic benefits to stockholders. Such factors may include
43
<PAGE> 46
(i) comparison of the proposed consideration to be received by stockholders in
relation to the then current market price of the Company's capital stock, (ii)
the estimated current value of the Company in a freely negotiated transaction
and the estimated future value of the Company as an independent entity, and
(iii) the impact of such a transaction on the employees, suppliers and customers
of the Company and its effect on the communities in which the Company operates.
The foregoing provisions could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from attempting
to acquire, control of the Company.
The Charter provides that any action required or permitted to be taken by
the stockholders of the Company may be taken only at duly called annual or
special meeting of the stockholders, and that special meetings may be called
only by the Chairman of the Board of Directors, a majority of the Board of
Directors or the President of the Company. These provisions could have the
effect of delaying until the next annual stockholders meeting stockholder
actions that are favored by the holders of a majority of the outstanding voting
securities of the Company. These provisions may also discourage another person
or entity from making a tender offer for the Common Stock because such person or
entity, even if it acquired a majority of the outstanding voting securities of
the Company, would be able to take action as a stockholder (such as electing new
directors or approving a merger) only at a duly called stockholders meeting, and
not by written consent.
The DGCL provides that the affirmative vote of a majority of the shares
entitled to vote on any matter is required to amend a corporation's certificate
of incorporation or by-laws, unless the corporation's certificate of
incorporation or by-laws, as the case may be, requires a greater percentage. The
Charter requires the affirmative vote of the holders of at least 67% of the
outstanding voting stock of the Company to amend or repeal any of the foregoing
Charter provisions, or to reduce the number of authorized shares of Common Stock
and Preferred Stock. Such 67% vote is also required to amend or repeal any of
the foregoing By-Law provisions. The By-Laws may also be amended or repealed by
a majority vote of the Board of Directors. Such 67% stockholder vote would be in
addition to any separate class vote that might in the future be required
pursuant to the terms of any Preferred Stock that might be outstanding at the
time any such amendments are submitted to stockholders.
See "Risk Factors -- Effect of Anti-Takeover Provisions; Availability of
Preferred Stock for Issuance."
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Charter contains certain provisions permitted under the DGCL relating
to the liability of directors. These provisions eliminate a director's personal
liability for monetary damages resulting from a breach of fiduciary duty, except
in certain circumstances involving certain wrongful acts, such as the breach of
a director's duty of loyalty or acts or omissions that involve intentional
misconduct or a knowing violation of law. These provisions do not limit or
eliminate the rights of the Company or any stockholder to seek non-monetary
relief, such as an injunction or rescission, in the event of a breach of a
director's fiduciary duty. These provisions will not alter a director's
liability under federal securities laws. The Company's Charter and By-Laws also
contain provisions indemnifying the directors and officers of the Company to the
fullest extent permitted by the DGCL. The Company believes that these provisions
will assist the Company in attracting and retaining qualified individuals to
serve as directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
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<PAGE> 47
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have a total of 8,264,306
shares of Common Stock outstanding. Of these shares, the 2,200,000 shares of
Common Stock offered hereby will be freely tradable without restriction or
registration under the Securities Act by persons other than "affiliates" of the
Company, as defined under the Securities Act. The remaining 6,064,306 shares of
Common Stock outstanding will be "restricted securities" as that term is defined
by Rule 144 as promulgated under the Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
for at least two years, including persons who may be deemed "affiliates" of the
Company, would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of one percent of the number of shares
of Common Stock then outstanding (approximately 82,643 shares upon completion of
the Offering) or the average weekly trading volume of the Common Stock during
the four calendar weeks preceding the filing of a Form 144 with respect to such
sale. Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements, and to the availability of current public information
about the Company. In addition, a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least three
years, would be entitled to sell such shares under Rule 144(k) without regard to
the requirements described above.
Under Rule 144 (and subject to the conditions thereof), approximately
2,847,921 restricted securities (including shares of Common Stock issuable upon
the exercise of currently exercisable warrants and options to purchase Common
Stock which are exercisable within 60 days of June 30, 1996) will become
eligible for sale upon completion of the Offering, of which 2,542,293 are
subject to lock-up restrictions as described below, and an additional
approximately 3,142,311 restricted securities (including shares of Common Stock
issuable upon the exercise of currently exercisable warrants and options to
purchase Common Stock which are exercisable within 60 days of June 30, 1996)
will become eligible for sale 90 days after the Offering, of which 2,828,313
shares are subject to lock-up restrictions as described below. The Company's
executive officers and directors and certain other stockholders of the Company
(who in the aggregate will hold 5,781,841 shares of Common Stock that constitute
restricted securities upon completion of the Offering, including shares of
Common Stock issuable upon the exercise of currently exercisable warrants and
options to purchase Common Stock which are exercisable within 60 days of June
30, 1996) have agreed that they will not directly or indirectly, offer, sell,
offer to sell, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, grant of any options to purchase or
sale or disposition) of any shares of Common Stock or other capital stock of the
Company, or any securities convertible into, or exercisable, or exchangeable
for, any shares of Common Stock or other capital stock of the Company without
the prior written consent of Hambrecht and Quist LLC, on behalf of the
Underwriters, for a period of 180 days from the date of this Prospectus.
Hambrecht & Quist LLC has no present intention to release any of the shares from
the Lock-up Agreements. It has been the practice of Hambrecht & Quist LLC to
consider releasing any such shares from lock-up agreements based on a variety of
factors, including the market price of the Common Stock, the volume of shares
traded and other market conditions.
The Company has granted certain warrants to purchase shares of Common
Stock. As of June 30, 1996, warrants to purchase 156,918 shares of Common Stock
at an exercise price of $.80 per share, and warrants to purchase 26,729 shares
of Common Stock at an exercise price of $2.64 per share, were outstanding. The
warrants to purchase 26,729 shares of Common Stock, at an exercise price of
$2.64 per share, will be redeemed by the Company upon the closing of the
Offering for $178,015 (assuming an initial public offering price of $10.00 per
share).
As of June 30, 1996, options to purchase a total of 283,792 and 53,500
shares of Common Stock pursuant to the Company's 1987 Nonqualified Stock Option
Plan and the Company's 1996 Stock Incentive Plan, respectively, and several
stock option agreements were outstanding with exercise
45
<PAGE> 48
prices ranging from $1.00 to $9.00 per share, of which options to purchase
171,546 shares of Common Stock were exercisable within 60 days of June 30, 1996.
As of the date of this Prospectus, an additional 1,746,500 shares of Common
Stock were available for future option grants under the 1996 Plan and the Stock
Purchase Plan. See "Management -- Stock Option Plans" and Note 7 to Financial
Statements. A total of 302,206 shares of Common Stock subject to options and
warrants held by officers, directors and certain stockholders are subject to
lockup agreements in connection with the Offering. See "Underwriting. "
Certain of the Company's stockholders holding in the aggregate 2,357,168
shares of Common Stock and warrants to purchase an additional 156,918 shares of
Common Stock have demand and/or piggyback registration rights to require the
Company to file one or more registration statements to effect the registration
under the Securities Act of such shares, which would permit such holders to
resell such shares without complying with Rule 144. Registration and sale of
such shares could have an adverse effect on the trading price of the Common
Stock. The holders of such shares of Common Stock and warrants to purchase
Common Stock have waived their rights to have such shares included in the
registration statement of which this Prospectus is a part.
Rule 701 under the Securities Act provides that shares of Common Stock
acquired on the exercise of outstanding options may be resold by persons other
than affiliates, beginning 90 days after the date of this Prospectus, subject
only to the manner of sale provisions of Rule 144, and by affiliates, beginning
90 days after the date of this Prospectus, subject to all provisions of Rule 144
except its two-year minimum holding period. The Company intends to file one or
more registration statements on Form S-8 under the Securities Act to register
shares of Common Stock subject to stock options.
Prior to the Offering, there has been no public market for the Common Stock
and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts of
such shares in the public market, or the perception that such sales could occur,
could materially and adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities. See "Risk Factors -- Shares Eligible for Future Sale."
46
<PAGE> 49
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representatives, Hambrecht & Quist LLC
and Volpe, Welty & Company, have severally agreed to purchase from the Company
the following respective numbers of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Hambrecht & Quist LLC.....................................................
Volpe, Welty & Company....................................................
Total................................................................... 2,200,000
========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company, its counsel and its
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to certain other
dealers. The Representatives of the Underwriters have informed the Company that
the Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority. After the initial public offering of the
shares, the offering price and other selling terms may be changed by the
Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 330,000
additional shares of Common Stock at the initial public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by it shown in the
above table bears to the total number of shares of Common Stock offered hereby.
The Company will be obligated, pursuant to the option, to sell shares to the
Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of shares of Common Stock offered hereby.
The Offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the Offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
47
<PAGE> 50
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
Certain existing stockholders of the Company, including the Company's
executive officers and directors, who will own in the aggregate 5,781,841 shares
of Common Stock after the Offering, have agreed that they will not, without the
prior written consent of Hambrecht & Quist LLC, directly or indirectly offer,
sell, contact to sell, make any short sale of, pledge, grant any option to
purchase or otherwise dispose of any shares of Common Stock, options or warrants
to acquire shares of Common Stock or securities exchangeable for or convertible
into shares of Common Stock owned by them during the 180-day period following
the date of this Prospectus. The Company has agreed that it will not, without
the prior written consent of Hambrecht & Quist LLC, directly or indirectly
offer, sell, contract to sell, make any short sale, pledge or otherwise dispose
of any shares of Common Stock or any securities exchangeable for or convertible
into shares of Common Stock during the 180-day period, following the date of
this Prospectus, except that the Company may issue, and grant options to
purchase, shares of Common Stock under its stock option and employee stock
purchase plans and under currently outstanding options and warrants. Sales of
such shares in the future could adversely affect the market price of the Common
Stock. Hambrecht & Quist LLC may, in its sole discretion, release any of the
shares subject to the lock-up at any time without notice. Hambrecht & Quist LLC
has no present intention to release any of the shares from the Lock-up
Agreements. It has been the practice of Hambrecht & Quist LLC to consider
releasing any such shares from lock-up agreements based on a variety of factors,
including the market price of the Common Stock, the volume of shares traded and
other market conditions.
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be determined
by negotiation among the Company and the Representatives. Among the factors to
be considered in determining the initial public offering price will be
prevailing market and economic conditions, revenues and earnings of the Company,
market valuations of other companies engaged in activities similar to those of
the Company, estimates of the business potential and prospects of the Company,
the present state of the Company's business operations, the Company's management
and other factors deemed relevant. Each of the Representatives has indicated
that it intends to make a market in the Company's Common Stock following this
Offering. However, none of the Representatives is required to make a market and
there can be no assurance that any Representative will continue to do so or that
an active public trading market will develop or be sustained.
LEGAL MATTERS
The validity of the Common Stock being offered hereby will be passed upon
for the Company by Bingham, Dana & Gould LLP. Victor J. Paci, a partner of
Bingham, Dana & Gould LLP, is Assistant Secretary of the Company. Certain legal
matters in connection with this Offering will be passed upon for the
Underwriters by Hale and Dorr, Boston, Massachusetts.
EXPERTS
The audited financial statements of the Company included in this Prospectus
and elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
48
<PAGE> 51
GLOSSARY
ATLAS SYSTEM............... MediQual's proprietary CIM system, comprised of
five major components (a standardized retrospective
data repository, proprietary benchmarking
databases, embedded clinical knowledge,
comprehensive provider databases, and on-line
analytical processing) and consisting of three
integrated modules (Atlas Market View, Atlas
Resources, and Atlas Outcomes).
ATLAS MARKET VIEW........ A module of the Atlas System that provides
competitive assessments of physicians and hospitals
on their relative efficiency, effectiveness, and
appropriateness of care.
ATLAS RESOURCES.......... A module of the Atlas System that provides
management assessments of the efficiency and
resource utilization of clinical processes and
physicians.
ATLAS OUTCOMES........... A module of the Atlas System that expands on Atlas
Resources by incorporating additional databases and
applications, enabling comprehensive internal
assessments of clinical processes and providers.
CD-ROM..................... A storage medium for digital information.
CIM SERVICES............... Clinical Information Management services, including
analytic services for the management of various
diseases, data abstraction services, and
development of custom databases, that are provided
by MediQual to providers, payors, and suppliers.
CIM SYSTEM................. Clinical Information Management system that
collects patient encounter data from transaction
systems and paper-based records and facilitates
retrospective analysis.
ICD-9 CODING SYSTEM........ A coding system for diagnoses and medical
procedures.
MEDISGROUPS................ The initial version of MediQual's CIM system, which
was introduced in 1987 and discontinued in 1996.
OLTP SYSTEM................ On-line transaction processing system that
facilitates individual transactions, usually in
real time.
UB-92 DATA................. A Uniform Billing dataset, amended in 1992, that
includes ICD-9 codes, patient and physician
demographics, and payor data.
49
<PAGE> 52
MEDIQUAL SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants............................................. F-2
Balance Sheets at December 31, 1994 and 1995 and June 30, 1996 (unaudited)........... F-3
Statements of Operations for the three years ended December 31, 1995 and for the
three months ended June 30, 1995 and 1996 (unaudited).............................. F-4
Statement of Redeemable Preferred Stock and Stockholders' Equity (Deficit) for the
three years ended December 31, 1995 and for the six months ended June 30, 1996
(unaudited)........................................................................ F-5
Statements of Cash Flows for the three years ended December 31, 1995 and for the six
months ended June 30, 1995 and 1996 (unaudited).................................... F-6
Notes to Financial Statements........................................................ F-7
</TABLE>
F-1
<PAGE> 53
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MediQual Systems, Inc.:
We have audited the accompanying balance sheets of MediQual Systems, Inc.
(a Delaware corporation) as of December 31, 1994 and 1995, and the related
statements of operations, redeemable preferred stock and stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MediQual Systems, Inc. as of
December 31, 1994 and 1995, and the results of its operations and cash flows for
each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
April 26, 1996 (except for the
matters discussed in Note 9 as
to which the date is June 19, 1996)
F-2
<PAGE> 54
MEDIQUAL SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, PROFORMA
--------------------------- JUNE 30, JUNE 30,
1994 1995 1996 1996
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................... $ 1,225,692 $ 1,006,477 $ 1,679,120 $ 1,679,120
Accounts receivable, less reserve for doubtful
accounts of $175,000 in 1994, $200,000 in 1995
and $175,000 in 1996............................ 1,146,917 1,025,358 1,453,124 1,453,124
Refundable income taxes........................... 211,000 -- -- --
Prepaid expenses.................................. 397,877 115,725 136,866 136,866
------------ ------------ ------------ ------------
Total current assets..................... 2,981,486 2,147,560 3,269,110 3,269,110
------------ ------------ ------------ ------------
Property and equipment, net....................... 1,687,611 950,402 796,335 796,335
Other assets...................................... 195,560 132,753 119,299 119,299
------------ ------------ ------------ ------------
$ 4,864,657 $ 3,230,715 $ 4,184,744 $ 4,184,744
============ ============ ============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable.................................. $ 372,446 $ 389,231 $ 418,401 $ 418,401
Accrued employee compensation and benefits........ 1,198,028 1,121,963 872,301 872,301
Accrued expenses.................................. 710,364 588,014 574,502 574,502
Deferred revenue.................................. 1,332,913 1,058,606 959,515 959,515
Current portion of long-term debt................. 482,829 414,172 156,747 156,747
------------ ------------ ------------ ------------
Total current liabilities................ 4,096,580 3,571,986 2,981,466 2,981,466
------------ ------------ ------------ ------------
Long-term debt, less current portion.............. 267,377 605,223 101,850 101,850
------------ ------------ ------------ ------------
Class A Redeemable preferred stock, nonvoting, no
par value -- 500 shares authorized, 229 shares
issued and outstanding (at redemption value).... 3,423,096 3,473,190 3,569,083 3,569,083
Class B Redeemable convertible preferred stock,
$.01 par value -- 6,500,000 shares authorized,
6,316,726 shares issued and outstanding (at
redemption value), no shares outstanding pro
forma........................................... 5,204,880 5,204,880 5,204,880 --
Class C Redeemable convertible preferred stock,
$.01 par value -- 2,100 shares authorized, 2,022
shares issued and outstanding (at redemption
value), no shares outstanding pro forma......... 2,358,043 2,602,839 2,734,607 --
------------ ------------ ------------ ------------
Total redeemable preferred stock......... 10,986,019 11,280,909 11,508,570 3,569,083
------------ ------------ ------------ ------------
Commitments (Notes 4 and 8)
Stockholders' Equity (Deficit):
Preferred stock, $.01 par value -- 7,000,000
shares authorized, no shares issued........... -- -- -- --
Common stock, $.001 par value -- 30,000,000 shares
authorized, 3,508,568, 3,523,662 shares and
3,880,776 shares issued at December 31, 1994 and
1995 and June 30, 1996; 6,064,306 shares issued
pro forma....................................... 3,508 3,523 3,881 6,064
Additional paid-in capital........................ 1,468,115 1,483,194 2,135,898 10,073,202
Accumulated deficit............................... (11,695,705) (13,452,883) (12,326,185) (12,326,185)
Treasury stock, at cost, 21,451 shares at December
31, 1994 and 1995 and 6,987 shares at June 30,
1996............................................ (59,714) (59,714) (19,213) (19,213)
Subscription receivable........................... (201,523) (201,523) (201,523) (201,523)
------------ ------------ ------------ ------------
Total stockholders' equity (deficit)..... (10,485,319) (12,227,403) (10,407,142) (2,467,655)
------------ ------------ ------------ ------------
$ 4,864,657 $ 3,230,715 $ 4,184,744 $ 4,184,744
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 55
MEDIQUAL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
System license fees........ $13,096,573 $11,609,205 $ 9,804,895 $ 4,786,910 $4,344,822
CIM services............... -- 475,166 1,168,944 500,308 1,362,304
---------- ---------- ---------- --------- ---------
13,096,573 12,084,371 10,973,839 5,287,218 5,707,126
---------- ---------- ---------- --------- ---------
Operating expenses:
Cost of revenues and
customer support........ 2,851,634 2,997,535 2,444,884 1,328,453 931,220
Marketing and
distribution............ 2,504,999 1,927,657 1,970,522 1,113,983 489,822
Research and development... 4,152,334 3,625,785 4,012,870 2,189,296 1,328,059
General and
administrative.......... 2,197,516 3,401,164 3,357,912 1,726,658 1,619,054
Restructuring charges
(credit)................ 1,623,157 -- 580,000 -- (101,784)
---------- ---------- ---------- --------- ---------
Total operating
expenses......... 13,329,640 11,952,141 12,366,188 6,358,390 4,266,371
---------- ---------- ---------- --------- ---------
Operating income (loss)...... (233,067) 132,230 (1,392,349) (1,071,172) 1,440,755
Interest expense............. 39,095 46,535 89,161 34,990 44,353
Interest (income) and other
(income) expense, net...... (94,462) (219,685) (19,222) (13,788) (142,642)
---------- ---------- ---------- --------- ---------
Income (loss) before income
taxes...................... (177,700) 305,380 (1,462,288) (1,092,374) 1,539,044
Provision for income taxes... 8,000 22,500 -- -- 184,685
---------- ---------- ---------- --------- ---------
Net income (loss)............ $ (185,700) $ 282,880 $(1,462,288) $(1,092,374) $1,354,359
========== ========== ========== ========= =========
Accretion of preferred stock
dividends.................. 204,971 392,091 294,890 119,376 227,661
---------- ---------- ---------- --------- ---------
Net income (loss) applicable
to common stockholders..... $ (390,671) $ (109,211) $(1,757,178) $(1,211,750) $1,126,698
========== ========== ========== ========= =========
Pro forma net income (loss)
per share (unaudited)...... $ (0.21) $ .20
Pro forma weighted average
shares outstanding
(unaudited)................ 6,466,718 6,981,819
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 56
MEDIQUAL SYSTEMS, INC.
STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
REDEEMABLE --------------------------------
REDEEMABLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- ------------------------- ------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ---------- ------------ ---------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1992....... 229 $3,184,077 6,316,726 $5,204,880 2,851,150 $2,851 $1,008,918
Sale of Class C preferred
stock, net of issuance costs
of $137,237.................. -- -- 2,022 2,000,000 -- -- (137,237)
Sale of common stock........... -- -- -- -- 333,229 333 270,045
Exercise of stock options...... -- -- -- -- 202,151 202 201,948
Net loss....................... -- -- -- -- -- -- --
Accretion of preferred stock
dividends.................... -- 68,700 -- 136,271 -- -- --
--- ---------- --------- ---------- ---------- ------ ------
BALANCE, DECEMBER 31, 1993....... 229 3,252,777 6,318,748 7,341,151 3,386,530 3,386 1,343,674
Exercise of stock options and
warrants..................... -- -- 122,038 122 124,441
Purchase of treasury stock..... -- -- -- -- --
Net income..................... -- -- -- -- --
Accretion of preferred stock
dividends.................... -- 170,319 -- 221,772 -- -- --
--- ---------- --------- ---------- ---------- ------ ------
BALANCE, DECEMBER 31, 1994....... 229 3,423,096 6,318,748 7,562,923 3,508,568 3,508 1,468,115
Exercise of stock options...... -- -- 15,094 15 15,079
Net loss....................... -- -- -- -- --
Accretion of preferred stock
dividends.................... -- 50,094 -- 244,796 -- -- --
--- ---------- --------- ---------- ---------- ------ ------
BALANCE, DECEMBER 31, 1995....... 229 3,473,190 6,318,748 7,807,719 3,523,662 3,523 1,483,194
Exercise of stock options...... -- -- -- -- 305,044 306 400,738
Exercise of convertible debt... 52,070 52 251,966
Sale of treasury stock......... -- -- -- -- --
Net income..................... -- -- -- -- -- -- --
Accretion of preferred stock
dividends.................... -- 95,893 -- 131,768 -- -- --
--- ---------- --------- ---------- ---------- ------ ------
BALANCE, JUNE 30, 1996
(unaudited).................... 229 $3,569,083 6,318,748 $7,939,487 3,880,776 $3,881 $2,135,898
=== ========== ========= ========== ========== ====== ======
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
-------------------------------------------------------------------
TREASURY STOCK
ACCUMULATED ------------------- SUBSCRIPTION
DEFICIT SHARES AMOUNT RECEIVABLE TOTAL
------------ -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1992....... $(11,195,823) -- $ -- $ -- $(10,184,054)
Sale of Class C preferred
stock, net of issuance costs
of $137,237.................. -- -- -- -- (137,237)
Sale of common stock........... -- -- -- (201,523) 68,855
Exercise of stock options...... -- -- -- -- 202,150
Net loss....................... (185,700) -- -- -- (185,700)
Accretion of preferred stock
dividends.................... (204,971) -- -- -- (204,971)
-------- --------- -------- --------- ------------
BALANCE, DECEMBER 31, 1993....... (11,586,494) -- -- (201,523) (10,440,957)
Exercise of stock options and
warrants..................... -- -- (59,714) -- 124,563
Purchase of treasury stock..... -- (21,451) -- -- (59,714)
Net income..................... 282,880 -- -- -- 282,880
Accretion of preferred stock
dividends.................... (392,091) -- -- -- (392,091)
-------- --------- -------- --------- ------------
BALANCE, DECEMBER 31, 1994....... (11,695,705) (21,451) (59,714) (201,523) (10,485,319)
Exercise of stock options...... -- -- -- -- 15,094
Net loss....................... (1,462,288) -- -- -- (1,462,288)
Accretion of preferred stock
dividends.................... (294,890) -- -- -- (294,890)
-------- --------- -------- --------- ------------
BALANCE, DECEMBER 31, 1995....... (13,452,883) (21,451) (59,714) (201,523) (12,227,403)
Exercise of stock options...... -- -- -- -- 401,044
Exercise of convertible debt... 252,018
Sale of treasury stock......... -- 14,464 40,501 -- 40,501
Net income..................... 1,354,359 -- -- -- 1,354,359
Accretion of preferred stock
dividends.................... (227,661) -- -- -- (227,661)
-------- --------- -------- --------- ------------
BALANCE, JUNE 30, 1996
(unaudited).................... $(12,326,185) (6,987) $(19,213) $ (201,523) $(10,407,142)
======== ========= ======== ========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 57
MEDIQUAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
---------- ---------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $ (185,700) $ 282,880 $(1,462,288) $(1,092,374) $1,354,359
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation.................................. 324,564 700,074 786,022 393,011 242,095
Non-cash portion of restructuring charges
(credit) (Note 7)........................... 1,106,533 -- 132,485 -- (101,784)
Changes in current assets and liabilities:
Accounts receivable......................... 652,848 753,539 121,559 576,505 (427,766)
Prepaid expenses and refundable income
taxes.................................... 3,593 (49,366) 493,151 263,844 (21,141)
Accounts payable............................ 55,311 (172,897) 16,785 333,791 29,170
Accrued employee compensation and
benefits................................. 226,478 132,829 (76,065) (666,442) (249,662)
Accrued expenses............................ (632,992) (383,917) (122,350) (93,557) 89,387
Deferred revenue............................ 513,389 (1,893,954) (274,307) (435,337) (99,091)
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) operating
activities............................. 2,064,024 (630,812) (385,008) (720,559) 815,567
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............. (1,545,798) (909,548) (181,297) (137,744) (89,143)
(Increase) decrease in other assets............. (53,868) (51,624) 62,807 34,445 13,454
---------- ---------- ---------- ---------- ----------
Net cash used in investing activities.... (1,599,666) (961,172) (118,490) (103,299) (75,689)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long-term debt................. -- 470,246 500,000 500,000 75,000
Repayments of long-term debt.................... (591,056) (118,832) (230,811) (114,470) (583,780)
Proceeds from exercise of stock options......... 202,150 124,563 15,094 13,250 401,044
Proceeds (payments) from sale (purchase) of
treasury stock................................ -- (59,714) -- -- 40,501
Proceeds from sale of common and preferred
stock......................................... 1,931,618 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) financing
activities............................. 1,542,712 416,263 284,283 398,780 (67,235)
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents..................................... 2,007,070 (1,175,721) (219,215) (425,078) 672,643
Cash and cash equivalents, beginning of period.... 394,343 2,401,413 1,225,692 1,225,692 1,006,477
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents, end of period.......... $2,401,413 $1,225,692 $ 1,006,477 $ 800,614 $1,679,120
========== ========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for --
Interest...................................... $ 19,423 $ 41,564 $ 59,445 $ 12,119 $ 25,647
========== ========== ========== ========== ==========
Income taxes, net of refunds received......... $ 5,640 $ 174,425 $ (209,250) $ (103,742) $ 20,850
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 58
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) DESCRIPTION OF BUSINESS
MediQual Systems, Inc. (the Company) is a leading supplier of clinical
information management systems and services to the health care industry. The
Company's systems and services combine proprietary clinical knowledge with raw
patient encounter data to create valuable information that providers, payors and
suppliers use to monitor and enhance the effectiveness, efficiency and
appropriateness of care.
The Company is subject to certain risks, including but not limited to
dependence on the Atlas System for a majority of the Company's revenues,
dependence on continued access to data, dependence on systems development
introduction and enhancements, competition from other service providers, and
dependence on key personnel. The Company has also experienced a limited history
of profitability.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements reflect the application of certain
significant accounting policies described below and elsewhere in these notes to
financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Unaudited Interim Financial Statements
In the opinion of the Company's management, the June 30, 1995 and 1996
unaudited interim financial statements include all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of results for
this interim period. The results of operations for the six months ended June 30,
1995 and 1996 are not necessarily indicative of the results to be expected for
the full year or for any future period.
Pro Forma Balance Sheet
Under the terms of the Company's agreements with the holders of the Class B
and Class C redeemable convertible preferred stock (See Note 5), all of such
preferred stock will be converted automatically into shares of common stock upon
the closing of the Company's proposed initial public offering. The pro forma
balance sheet reflects the assumed conversion of the redeemable convertible
preferred stock into common stock.
Cash and Cash Equivalents
The Company considers all highly liquid investments, if any, with an
original maturity of less than three months to be cash equivalents. Cash
equivalents consist mainly of money market funds.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentrations
of credit risk consist primarily of cash and cash equivalents, and trade
accounts receivable. The Company places its temporary cash investments in highly
rated financial institutions. The Company has not experienced any losses on
these investments to date. The Company has not experienced significant losses
related to receivables from individual customers or groups of customers in the
health care industry or by geographic area. Due to these factors, no additional
credit risk beyond amounts provided for collection losses is believed by
management to be inherent in the Company's accounts receivable.
F-7
<PAGE> 59
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
Disclosure of Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, accounts receivable, accounts payable and long-term obligations.
The carrying amounts of the Company's cash and cash equivalents, accounts
receivable and accounts payables approximate fair value due to the short-term
nature of these instruments. The Company's long-term obligations, which bear
interest at a variable market rate, have a carrying amount that approximates
fair value. These long-term obligations, which carry a fixed rate of interest,
also approximate fair value, based on rates available to the Company for debt
with similar terms and remaining maturities.
Property and Equipment
Property and equipment are stated at cost. The Company provides for
depreciation on a straight line basis over a three-to-five year estimated useful
life. Repairs and maintenance costs are charged to expense as incurred.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Computer equipment.......................... $2,103,962 $2,051,921 $2,141,064
Furniture and fixtures...................... 385,624 270,369 270,369
Equipment under capital lease............... 204,149 204,149 204,149
Leasehold improvements...................... 19,253 19,253 19,253
--------- --------- ---------
2,712,988 2,545,692 2,634,835
Less accumulated depreciation............... 1,025,377 1,595,290 1,838,500
--------- --------- ---------
$1,687,611 $ 950,402 $ 796,335
========= ========= =========
</TABLE>
Software Development Costs
Software development costs are considered for capitalization when
technological feasibility is established in accordance with Statement of
Financial Accounting Standards (SFAS) No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed. The Company sells
software in a market that is subject to rapid technological change, new product
introductions and changing customer needs. Accordingly, the Company has
determined that it cannot determine technological feasibility until the
development state of the product is nearly complete. The time period during
which cost could be capitalized from the point of reaching technological
feasibility until the time of general product release is very short and,
consequently, the amounts that could be capitalized are not material to the
Company's financial position or results of operations. Therefore, the Company
charges all research and development expenses to operations in the period
incurred.
Other Assets
Other assets at December 31, 1994 and December 31, 1995 include restricted
cash of approximately $117,000 and $120,000, respectively, held in escrow in
connection with an operating lease.
Revenue Recognition
The Company licenses its systems pursuant to annual agreements that provide
for the payment of license fees at the beginning of the term. System license
fees cover software and database upgrades and enhancements and telephone
customer support. Renewal of these Agreements is subject to annual price
increases. Revenues from system licenses are recognized upon shipment of the
system to the customer or the anniversary of the original shipment if collection
is probable and remaining Company
F-8
<PAGE> 60
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
obligations are insignificant. The portion of license fees relating to system
maintenance is deferred and recognized over the annual maintenance period. CIM
service revenues, including analytical and data collection services are
recognized as the services are performed. Unrecognized amounts are recorded as
deferred revenue in the accompanying balance sheets.
Income Taxes
The Company follows SFAS No. 109, Accounting for Income Taxes, by providing
for federal and state income taxes under the liability method. Deferred taxes
are determined based on the difference between the financial statement and tax
bases of assets and liabilities, as measured by the current statutory tax rates.
The Company's deferred income taxes as of December 31, were as follows:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Tax assets:
Net operating loss carryforwards.......... $3,812,000 $4,137,000
Reserves not yet deductible for tax
purposes............................... 198,000 359,000
Deferred revenue.......................... 396,000 194,000
Federal tax credits....................... 204,000 204,000
----------- -----------
Total tax assets....................... 4,610,000 4,894,000
Tax liabilities:
Property basis differences................ (20,000) (88,000)
Other..................................... (34,000) (6,000)
----------- -----------
Total tax liabilities.................. (54,000) (94,000)
----------- -----------
Net tax asset.......................... 4,556,000 4,800,000
Less valuation allowance............... (4,556,000) (4,800,000)
----------- -----------
Amount recorded in financial
statements........................... $ -- $ --
=========== ===========
</TABLE>
The provision for income taxes in 1993 and 1994 represent minimum state
income taxes currently payable. At December 31, 1995, the Company had net
operating loss carryforwards for federal income tax purposes of $10,342,000
expiring through the year 2009. The Company also has available federal tax
credits of $204,000 expiring through the year 2003. Under SFAS No. 109, the
Company cannot recognize a deferred tax asset for the future benefit of its net
operating loss carryforwards unless it concludes that it is "more likely than
not" that the deferred tax asset would be realized. Due to its history of
operating losses, the Company has recorded a full valuation allowance against
its otherwise recognizable net deferred tax asset, in accordance with SFAS No.
109.
Section 382 of the Internal Revenue Code relates to the use of corporate
tax attributes following a change in ownership. Under this Section, a defined
ownership change can result from the issuance of new equity securities. The
Company's net operating loss and tax credit carryforwards available to be used
in any given year may be limited in the event of such ownership changes.
Pro Forma Net Income (Loss) Per Share
Pro forma net income (loss) per share is computed for each period based on
the weighted average number of common shares outstanding and dilutive common
stock equivalents. For purposes of this calculation, dilutive stock options are
considered common stock equivalents using the treasury stock method. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, common and
common equivalent shares issued during the 12 month period prior to the date of
the initial filing of the Company's Registration Statement have been included in
the calculation, using the treasury stock method, as if they were outstanding
for all periods presented. Fair market value for the purpose
F-9
<PAGE> 61
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
of this calculation was assumed to be $10.00, which is the mid-point of the
assumed initial public offering price range. Also, all outstanding shares of
Class B and C Convertible Redeemable Preferred Stock, which will automatically
convert into common stock upon the closing of the Company's proposed initial
public offering, are assumed to be converted to common stock at the time of
issuance.
Pro forma net income (loss) per share also assumes the elimination of
preferred stock accretion and interest expense relating to the assumed preferred
stock redemption and debt repayment with the proceeds from the Company's
proposed public offering. Pro forma weighted average shares outstanding includes
the additional number of shares required to be issued in the proposed public
offering to generate enough net proceeds to redeem the Class A preferred stock
and repay all outstanding debt. Historical net income per share data have not
been presented as such information is not considered to be relevant or material.
(3) DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1994 1995 1996
-------- ---------- ----------
<S> <C> <C> <C>
Line of credit........................ $ -- $ 500,000 $ --
Equipment term note................... 418,717 261,970 183,597
Obligations under capital lease....... 79,471 5,407 --
Convertible debenture................. 252,018 252,018 --
Note payable to officer (Note 8)...... -- -- 75,000
-------- -------- ----------
750,206 1,019,395 258,597
Less current portion.................. 482,829 414,172 156,747
-------- -------- ----------
$267,377 $ 605,223 $ 101,850
======== ======== ==========
</TABLE>
Line of Credit
The Company has a working capital line-of-credit agreement with a bank
expiring on January 5, 1997, unless renewed. Borrowings under the line of credit
are collateralized by substantially all of the Company's assets and may not
exceed the lesser of $500,000 or eligible accounts receivable. Interest is
payable monthly at the bank's prime rate (8.5% at December 31, 1994 and 8.25% at
December 31, 1995 and June 30, 1996) plus .5%, 2% and 2% at December 31, 1994,
December 31, 1995 and June 30, 1996, respectively.
On May 17, 1996, the bank expanded the line of credit facility to
$1,500,000, subject to eligible accounts receivable, at an interest rate of
prime plus 1%, reducing to prime upon the completion of a public offering,
maturing on January 5, 1997.
Equipment Term Note
Borrowings through June 30, 1994 under a previous equipment line of credit
converted to a term note, payable in 36 equal monthly installments of principal
beginning on July 5, 1994. Interest is payable monthly at the bank's prime rate
(8.5% at December 31, 1994 and 8.25% at December 31, 1995 and June 30, 1996)
plus 1.5%. Borrowings are secured by substantially all assets of the Company.
The line of credit and the equipment term note both have restrictive
covenants that require the Company to achieve certain levels of profitability
and tangible net worth and to meet certain financial ratios. At December 31,
1995, the Company was not in compliance with the profitability and tangible net
worth covenants, which were waived by the bank on April 25, 1996 for all past
failures.
F-10
<PAGE> 62
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
Obligations Under Capital Lease
In connection with a capital lease obligation, the Company issued warrants
to the lessor to purchase 105,661 shares of the Company's Series 1987 Class B
convertible preferred stock, subject to certain antidilution provisions. The
warrants are exercisable at $.66 per share and expire in December 1996. As of
June 30, 1996, the cost of the equipment under capital lease of $204,149 had
been fully depreciated.
Convertible Debenture
In November 1991, in connection with the settlement of certain royalty
obligations with a former product development partner, the Company issued an 8%
convertible debenture with interest due quarterly, commencing on December 31,
1991 and issued an option to purchase 34,068 shares of common stock at an
exercise price of $4.84 per share to an affiliate of the holder of the
convertible debenture. The principal balance, plus any accrued interest, was due
on November 20, 1995. In June 1996, the note was converted into 52,070 shares of
common stock and the option was exercised.
Required principal payments of debt as of December 31, 1995 for each of the
next two years are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
----------------------------------------------------------- ---------
<S> <C>
1996....................................................... $ 414,172
1997....................................................... 605,223
----------
$1,019,395
==========
</TABLE>
(4) COMMITMENTS
Operating Leases
The Company leases its facilities and certain equipment under operating
leases that expire through March 1999. A multi-year facility lease has favorable
lease payments in the initial and early years of the lease. Total lease payments
are recognized on a straight-line basis over the lives of the leases with the
difference between payment amount and expense recognized as accrued rent in the
accompanying balance sheets. The future minimum annual lease payments at
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
----------------------------------------------------------- ---------
<S> <C>
1996....................................................... $ 648,000
1997....................................................... 417,000
1998....................................................... 396,000
1999....................................................... 99,000
----------
$1,560,000
==========
</TABLE>
Total rent expense included in the accompanying statements of operations is
$656,000, $584,000 and $674,000 for the years ended December 31, 1993, 1994 and
1995, respectively, and $331,129 and $307,038 for the six months ended June 30,
1995 and 1996, respectively.
F-11
<PAGE> 63
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(5) REDEEMABLE PREFERRED STOCK
Class A Redeemable Preferred Stock
The following summarizes the relative powers, designations and rights of
the Class A preferred stock:
LIQUIDATION
Holders of Class A preferred stock are entitled to be paid $10,000 per
share plus accrued but unpaid dividends in the event of a liquidation or
dissolution of the Company before any amount is paid to common stockholders, but
after any distribution to Class B and Class C preferred stockholders.
DIVIDENDS
Holders of Class A preferred stock are entitled to receive quarterly
dividends from net profits, as defined, if any. Dividends are cumulative. At
December 31, 1995 and June 30, 1996, the Company had cumulative dividends in
arrears of $1,183,189 and $1,279,083, respectively, on the Class A preferred
stock.
REDEMPTION
The Class A preferred stock is redeemable on or after January 1, 1997 at
the option of the holder for $10,000 per share plus accrued dividends. Class A
preferred stock redemptions and dividends are payable only from one-third of
legally available funds of the Company, only after all Class C convertible
preferred stock redemptions have been paid. The Company will redeem the Class A
preferred stock upon completion of this Offering.
VOTING RIGHTS
Class A preferred stock is nonvoting.
Class B Redeemable Convertible Preferred Stock
The following summarizes the relative powers, designations and rights of
the Series 1986 and 1987 Class B convertible preferred stock:
LIQUIDATION
In the event of any liquidation or dissolution of the Company, the holders
of the Series 1986 and 1987 Class B convertible preferred stock shall be
entitled to receive $.70 and $2.00 per share, respectively, prior to any
distributions to the holders of Class A preferred stock or common stock but
after any distribution to the holders of the Class C convertible preferred
stock.
CONVERSION
Each share of Class B convertible preferred stock is convertible at the
option of the holder, or automatically in the event of a public stock offering,
as defined, into approximately one-fourth of a share of common stock, based on
original issue price. This conversion rate is adjusted upon the occurrence of
certain dilutive events.
F-12
<PAGE> 64
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
REDEMPTION
The Class B convertible preferred stock is redeemable in whole or in part
on or after January 1, 1997 at the option of the holders. The redemption price
for Series 1986 and 1987 convertible preferred stock is $.70 and $2.00 per
share, respectively, plus any accrued and unpaid dividends. Class B convertible
preferred stock redemptions and dividends are payable only from two-thirds of
legally available funds of the Company only after all Class C convertible
preferred stock redemptions have been paid.
DIVIDENDS
The Class B convertible preferred stockholders are entitled to any
dividends that may be declared on the common stock. The amount of the dividend
is equal to the dividend per common share multiplied by the number of common
shares that each preferred stockholder would receive upon conversion.
VOTING RIGHTS
Holders of Class B convertible preferred stock vote together with common
stockholders as one class, with special provisions for electing members to the
Board of Directors. Class B convertible preferred stockholders are entitled to
the number of votes that they would receive if they converted their Class B
convertible preferred stock into common stock at the applicable conversion rate.
Also, provided that at least 1,263,345 shares of the Class B convertible
preferred stock remain outstanding, the Company is restricted from taking
certain actions without the vote or written consent of the holders of a majority
of the Class B convertible preferred stock.
Class C Redeemable Convertible Preferred Stock
The following summarizes the relative powers, designations and rights of
the Class C convertible preferred stock:
LIQUIDATION
In the event of any liquidation or dissolution of the Company, the holders
of the Class C convertible preferred stock shall be entitled to receive
approximately $990.00 per share plus all accrued but unpaid dividends prior to
any distribution to the holders of Class A preferred stock, Class B convertible
preferred stock or common stock.
CONVERSION
Each share of Class C convertible preferred stock is convertible at the
option of the holder, or automatically in the event of a public offering, as
defined, into approximately 250 shares of common stock plus 50% of accrued and
unpaid dividends per share of Class C convertible preferred stock. This
conversion rate is adjusted upon the occurrence of certain dilutive events.
REDEMPTION
The Class C convertible preferred stock is redeemable in whole or in part
on or after January 1, 1997 at the option of the holders. The redemption price
for the Class C convertible preferred stock is $1,000 per share plus any accrued
and unpaid dividends. Class C convertible preferred stock redemptions and
dividends are payable from legally available funds of the Company prior to any
redemption of Class A and Class B preferred stock.
F-13
<PAGE> 65
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
DIVIDENDS
The Class C convertible preferred stockholders are entitled to receive
quarterly dividends. Dividends are cumulative at 2.5% per quarter of the Class C
convertible preferred stock liquidation value. At December 31, 1995 and June 30,
1996, the Company had cumulative dividends in arrears of $602,839 and $734,607,
respectively, on the Class C convertible preferred stock. Dividends on the Class
C convertible preferred stock shall be paid before any dividends for any other
class of stock.
VOTING RIGHTS
Holders of Class C convertible preferred stock vote together with common
stockholders as one class, with special provisions for electing members to the
Board of Directors. Class C convertible preferred stockholders are entitled to
the number of votes that they would receive if they converted their stock to
common stock. The Company is restricted from taking certain action without the
vote or written consent of the holders of a majority of the outstanding Class C
convertible preferred stock.
(6) STOCKHOLDERS' EQUITY
Common Stock
The Company has reserved 856,656 shares of common stock for issuance to
employees, directors and others pursuant to the granting of nonqualified stock
options under the Company's stock option plan (see below). The Company is also
required to reserve a sufficient number of shares to effect the conversion of
the Class B convertible preferred stock, Class C convertible preferred stock and
warrants (2,367,178 shares at June 30, 1996).
Subscription Receivable
Subscriptions receivable represents a note receivable from an officer for
$201,523 that was issued in connection with his purchase of 314,403 shares of
common stock in 1993. The note bears interest at 3.92% per year. In connection
with the employment agreement and incentive arrangement discussed in Note 8, the
note receivable will be forgiven upon completion of the Company's proposed
public offering at a minimum valuation, as defined,
Nonqualified Stock Option Plan
The Company maintains a 1987 Nonqualified Stock Option Plan (the "1987
Plan"). Options granted, prices and vesting periods are determined by the Board
of Directors. The majority of the grants vest ratably over 50 months. At June
30, 1996, 33,168 shares remained available for grants of options under the 1987
Plan. In May 1996, the Board of Directors of the Company terminated the 1987
Plan with respect to the granting of any further options thereunder.
F-14
<PAGE> 66
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
The following table summarizes all employee stock option activity:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE RANGE
SHARES PER SHARE
--------- ------------------
<S> <C> <C>
Outstanding at December 31, 1993...................... 500,547 $1.00-1.40
Granted............................................. 21,250 2.80
Exercised........................................... (120,888) 1.00-2.80
Canceled............................................ (42,459) 1.00-2.80
--------
Outstanding at December 31, 1994...................... 358,450 1.00-2.80
Granted............................................. 97,200 1.00-2.80
Exercised........................................... (15,094) 1.00-2.80
Canceled............................................ (213,825) 1.00-2.80
--------
Outstanding at December 31, 1995...................... 226,731 1.00
Granted............................................. 448,687 1.00-9.00
Exercised........................................... (270,976) 1.00
Canceled............................................ (67,150) 1.00
--------
Outstanding at March 31, 1996......................... 337,292 1.00-9.00
--------
Exercisable at March 31, 1996......................... 163,948 $1.00-9.00
========
</TABLE>
Warrants
On April 29, 1993, the Company issued one warrant for each 10 shares of
Class B convertible preferred stock held by existing Class B convertible
preferred stockholders, or an aggregate of warrants to purchase 158,069 shares
of common stock. Each warrant has an exercise price of $.80 per share, the fair
market value of the common stock on the date of grant, as determined by the
Board of Directors. The exercise price is adjusted upon the occurrence of
certain dilutive events. The warrants are exercisable at the option of the
holder through April 29, 2003. Warrants to purchase 1,150 shares of common stock
were exercised in 1994.
(7) RESTRUCTURING CHARGES
In 1993, the Company recorded a $1,623,157 charge to consolidate all of the
Company's field operations and to write off all remaining capitalized software
costs related to discontinued products and obsolete equipment. In 1995, the
Company recorded a $580,000 charge to reflect a staff reduction of 15 research
and development employees, 1 general and administrative employee, 11 customer
support employees, and 4 sales employees, as well as office space consolidation
which occurred on December 13, 1995.
The components of the restructuring charges are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1995
---------- --------
<S> <C> <C>
Severance and benefits....................................... $ 376,267 $294,839
Obsolete fixed asset disposals and write-offs................ 800,656 112,986
Excess facility rent and office closings..................... 198,234 172,175
Unrealizable software development costs...................... 248,000 --
-------- --------
$1,623,157 $580,000
========== ========
</TABLE>
F-15
<PAGE> 67
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
At December 31, 1995, $292,600 and $153,000 was included in accrued
compensation and benefits and accrued expenses, respectively, related to
restructuring costs. At June 30, 1996, $50,892 was included in accrued expenses
related to the restructuring costs. During the six months ended June 30, 1996,
the Company was able to negotiate a favorable settlement for certain excess
leased facilities and reduced the related accrued liability by $101,784, which
has been recorded in the accompanying statement of operations as a restructuring
credit. The Company does not anticipate any further adjustments relating to the
restructuring effected in December 1995. Included in the 1993 and 1995
statements of cash flows as an adjustment to reconcile net loss to net cash
provided by (used in) operating activities is $1,106,533 and $132,485 related to
the asset write-offs and rent reserves, respectively.
(8) EMPLOYEE BENEFITS
401(k) Plan
The Company maintains a defined contribution plan under Section 401(k) of
the Internal Revenue Code. This plan allows employees to contribute up to 15% of
their compensation to the plan. Under the plan, the Company may, but is not
obligated to, match a portion of the employees' contributions up to a defined
maximum. There were no matching contributions in 1993, 1994 or 1995.
Employment Agreements
In January 1996, the Company and its chief executive officer entered into
an employment agreement and incentive arrangement. Pursuant to the agreement,
the officer received a note payable for $75,000 representing his 1995 incentive
pay. The note bears interest at 10% per year and is payable upon the earlier of
January 2, 1998, the officer's voluntary termination, or the sale of the
Company. The note is included in long-term debt at June 30, 1996.
Under the incentive arrangement, the chief executive officer received an
option to purchase up to 225,000 shares of common stock and a cash bonus of up
to $200,000. The cash bonus is contingent on completion of an initial public
offering at a minimum valuation. The option is exercisable at a price of $1.00
per share, the then fair market value of the common stock and is exercisable
immediately, subject to a right of the Company to repurchase such shares until
the earlier of five years of the date of grant or the closing of an initial
public offering or sale of the Company based on a specified valuation. The
officer exercised the option for 225,000 shares of common stock in full on March
29, 1996. The shares are subject to repurchase in accordance with the terms
noted above. The Company has accrued approximately $400,000 of compensation
expense as of June 30, 1996 in connection with the employment and incentive
plan.
The Company entered into stay agreements with certain key officers under
which the Company guarantees the officer who is a party thereto a severance
payment in an amount equal to such officer's twelve-month base salary in the
event that the officer's employment is terminated other than at such officer's
volition.
(9) SUBSEQUENT EVENTS
Recapitalization
On June 19, 1996, the stockholders of the Company approved a 1-for-4
reverse stock split of the Company's common stock. Accordingly, all share and
per share amounts have been adjusted to reflect the reverse stock split as
though it had occurred at the beginning of the initial period presented.
F-16
<PAGE> 68
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
1996 Stock Incentive Plan
In May 1996, the Company's Board of Directors and stockholders approved the
Company's 1996 Stock Incentive Plan (the "1996 Plan"), which provides for the
grant of incentive stock options, nonqualified stock options and restricted
stock awards to employees of the Company (including officers and employee
directors). A maximum of 1,500,000 shares are currently reserved for issuance
pursuant to the 1996 Plan. This maximum number of shares will increase,
effective as of January 1, 1998 and each January 1 thereafter during the term of
the plan, by an additional number of shares of Common Stock equal to ten percent
of the difference between (i) the total number of shares of Common Stock and
Common Stock equivalents issued and outstanding as of the close of business on
December 31 of the preceding year and (ii) the total number of shares of Common
Stock and Common Stock equivalents issued and outstanding as of the close of
business on December 31 of the year prior to such preceding year. No participant
in the 1996 Plan may in any year be granted stock options or awards with respect
to more than 500,000 shares of Common Stock, and no more than an aggregate of
3,000,000 shares of Common Stock may be issued pursuant to the exercise of
incentive stock options granted under the 1996 Plan. As of June 30, 1996,
options to purchase 53,500 shares of common stock at an exercise price of $9.00
per share had been granted under the 1996 Plan.
1996 Employee Stock Purchase Plan
In May 1996, the Company's Board of Directors approved the 1996 Employee
Stock Purchase Plan (the "Stock Purchase Plan"), which enables eligible
employees to acquire shares of the Company's Common Stock through payroll
deductions. The Stock Purchase Plan is intended to qualify as an "employee stock
purchase plan" under Section 423 of the Internal Revenue Code of 1986, as
amended. Offerings under the Stock Purchase Plan are planned to commence on
February 1 and August 1 of each year and to end on July 31 and January 31 of
each year. The initial offering period is intended to commence on the effective
date of the registration statement relating to this Offering and to end on
January 31, 1997, unless otherwise determined by the Board. During this offering
period, an eligible employee may select a rate of payroll deduction of up to 15%
of his or her compensation up to an aggregate total payroll deduction not to
exceed $12,500 in any offering period. The purchase price for the Company's
Common Stock purchased under the Stock Purchase Plan is 85% of the lesser of the
fair market value of the shares on the first day or the last day of the offering
period. A total of 300,000 shares of Common Stock have been reserved for
issuance under the Stock Purchase Plan.
F-17
<PAGE> 69
- ------------------------------------------------------------
- ------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH A SOLICITATION OR OFFER. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information....................... 2
Prospectus Summary........................... 3
Risk Factors................................. 5
The Company.................................. 11
Use of Proceeds.............................. 11
Dividend Policy.............................. 12
Capitalization............................... 13
Dilution..................................... 14
Selected Financial Data...................... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................. 16
Business..................................... 23
Management................................... 32
Certain Transactions......................... 39
Principal Stockholders....................... 40
Description of Capital Stock................. 42
Shares Eligible for Future Sale.............. 45
Underwriting................................. 47
Legal Matters................................ 48
Experts...................................... 48
Glossary..................................... 49
Index to Financial Statements................ F-1
</TABLE>
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
2,200,000 SHARES
LOGO
COMMON STOCK
--------------------
PROSPECTUS
--------------------
HAMBRECHT & QUIST
VOLPE, WELTY& COMPANY
, 1996
- ------------------------------------------------------------
- ------------------------------------------------------------
<PAGE> 70
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate (except for the Securities and Exchange
Commission Registration Fee, the NASD Filing Fee, and the Nasdaq National Market
Listing Fee) of the fees and expenses all of which are payable by the
Registrant, other than underwriting discounts and commissions, in connection
with the registration and sale of the Common Stock being registered:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee..................... $ 9,597
NASD Fees............................................................... 3,283
Nasdaq National Market Listing Fee...................................... 38,140
Fees of Registrar and Transfer Agent.................................... *
Printing and Engraving.................................................. *
Legal Fees and Expenses (including Blue Sky Fees and Expenses).......... *
Accounting Fees and Expenses............................................ *
Miscellaneous........................................................... *
--------
Total................................................................. $500,000
========
</TABLE>
- ---------------
*To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law empowers a Delaware
corporation to indemnify its officers and directors and certain other persons to
the extent and under the circumstances set forth therein.
Article Seventh of the Amended and Restated Certificate of Incorporation of
the Company (the "Charter"), a copy of which is filed herein as Exhibit 3.1,
provides that no director shall be liable to the Company or to its stockholders
for breach of fiduciary duty as a director, other than (i) for breach of the
director's duty of loyalty, (ii) for acts or omissions not in good faith, (iii)
for any transaction from which the director derived an improper personal benefit
and (iv) under Section 174 of Title 8 of the Delaware General Corporation Law.
Article Ninth of the Charter provides for indemnification of all persons whom
the Company has the power to indemnify under law to the fullest extent permitted
by the Delaware General Corporation Law.
Article VIII of the Amended and Restated By-laws of the Company, a copy of
which is filed herein as Exhibit 3.2, provides for indemnification of officers
and directors of the Company and certain other persons against liabilities and
expenses incurred by any of them in certain stated proceedings and under certain
stated conditions.
Section 7(a) of the Underwriting Agreement between the Company and the
Underwriters, a copy of which is filed herein as Exhibit 1, provides for
indemnification by the Company of the Underwriters and each person, if any, who
controls any Underwriter, against certain liabilities and expenses, as stated
therein, which may include liabilities under the Securities Act of 1933. The
Underwriting Agreement also provides that the Underwriters shall similarly
indemnify the Company, its directors, officers, and controlling persons, as set
forth therein.
The Company intends to maintain insurance for the benefit of its directors
and officers insuring such persons against certain liabilities, including
liabilities under the securities laws.
II-1
<PAGE> 71
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this Registration Statement, the
Registrant has issued and sold the following unregistered securities, all share
numbers and per share prices of which have been adjusted (for purposes of this
Item 15) to reflect the proposed four-for-one reverse split of the Common Stock
which is expected to occur in June 1996.
On August 30, 1994, the Registrant issued an aggregate of 1,150 shares of
Common Stock to Robert J. Strasenburgh and Betty Strasenburgh for an aggregate
consideration of $920 upon exercise of outstanding warrants.
On March 29, 1996, the Registrant issued 8,357, 3,571, 1,785, and 750
shares of Common Stock valued at $1.00 per share to William C. Price, James
Corum, Elizabeth A. Endyke, and Diane M. Throop, respectively, in partial
payment of certain bonus payments owed by the Registrant to such persons, and
issued 225,000 shares of Common Stock to Eric A. Kriss upon the exercise of an
option granted pursuant to an incentive arrangement between the Registrant and
Mr. Kriss at a purchase price of $1.00 per share.
On June 19, 1996, the Registrant issued 25,000 and 9,068 shares of Common
Stock to The Fallon Foundation upon exercise of options at $4.84 and $1.00 per
share, respectively, and issued 52,069 shares of Common Stock to St. Vincent
Hospital, Inc. upon conversion of a debenture at a conversion price of
approximately $4.84 per share.
During the period from July 14, 1993 through June 30, 1996, the Registrant
issued an aggregate of 278,639 shares of Common Stock to directors, officers and
employees of the Registrant pursuant to the Company's 1987 Nonqualified Stock
Option Plan (the "1987 Plan") upon the exercise of options at prices ranging
from $1.00 to $1.40 per share for an aggregate consideration of $281,424. During
that period, the Registrant also granted options to directors, officers and
employees of the Registrant to purchase an aggregate of 302,150 shares of its
Common Stock pursuant to the 1987 Plan at exercise prices ranging from $1.00 to
$2.80 per share, all of which have been repriced at $1.00, and an aggregate of
53,500 shares of its Common Stock pursuant to the Company's 1996 Stock Incentive
Plan at an exercise price of $9.00 per share. On January 20, 1996, the
Registrant granted an option to The Fallon Foundation to purchase 9,068 shares
of Common Stock at an exercise price of $1.00 per share in connection with a
Settlement Agreement dated November 20, 1991.
No underwriters were involved in connection with the foregoing sales of
securities. Such sales were made in reliance upon the exemption from the
registration provisions of the Securities Act of 1933, as amended (the
"Securities Act"), set forth in Section 4(2) thereof relative to sales by an
issuer not including any public offering. All of the foregoing securities are
deemed to be restrictive securities for purposes of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------------------------
<C> <S>
**1 Proposed Form of Underwriting Agreement.
**3.1 Amended and Restated Certificate of Incorporation of the Registrant.
**3.2 Amended and Restated By-Laws of the Registrant.
4 Specimen Certificate for shares of the Company's Common Stock.
**5 Opinion of Bingham, Dana & Gould, LLP counsel to the Registrant, regarding the
legality of the shares of Common Stock.
**10.1 1987 Nonqualified Stock Option Plan of the Registrant, as amended.
**10.2 Form of 1996 Stock Incentive Plan of the Registrant.
</TABLE>
II-2
<PAGE> 72
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------------------------
<C> <S>
**10.3 Form of 1996 Employee Stock Purchase Plan of the Registrant.
**10.4 Lease of Westborough Office Park Building Two, dated as of July 21, 1986,
between WRC Properties, Inc. and the Registrant (the "Lease").
**10.5 First Amendment to the Lease, dated as of September 22, 1987, between WRC
Properties, Inc. and the Registrant.
**10.6 Second Amendment to Amended and Restated Lease, dated as of July 1989, between
WRC Properties, Inc. and the Registrant.
**10.7 Third Amendment to Amended and Restated Lease, dated as of December 31, 1990,
between WRC Properties, Inc. and the Registrant.
**10.8 Fourth Amendment to Amended and Restated Lease, dated as of September 22, 1993,
between WRC Properties, Inc. and the Registrant.
**10.9 Fifth Amendment to Amended and Restated Lease, dated as of December 1993,
between WRC Properties, Inc. and the Registrant.
**10.10 Sixth Amendment to Amended and Restated Lease, dated as of April 30, 1996,
between WRC Properties, Inc. and the Registrant.
**10.11 Stock Purchase Agreement, dated March 31, 1984, between William D. Ryan and the
Registrant.
**10.12 Form of Stock Purchase Agreement, dated as of August 4, 1986, among the
Registrant and the purchasers named therein, as amended, relating to the sale by
the Registrant of shares of Class B Convertible Preferred Stock.
**10.13 Form of Stock Purchase Agreement, dated as of October 1987, among the Registrant
and the purchasers named therein, as amended, relating to the sale by the
Registrant of shares of Series 1987 Class B Convertible Preferred Stock.
**10.14 Stock Purchase Agreement, dated as of April 1, 1993, among the Registrant and
the purchasers named therein (the "Purchasers"), as amended, relating to the
sale by the Registrant of shares of Class C Convertible Preferred Stock.
**10.15 Form of letter agreement, dated as of April 27, 1993, among the Registrant and
the Purchasers relating to possible issuance by the Registrant of additional
shares of Class C Convertible Preferred Stock.
**10.16 Registration Rights Agreement, dated as of April 27, 1993, among the Registrant,
the Purchasers and the Investors named therein.
**10.17 Agreement of Shareholders, dated as of April 27, 1995, among the Registrant,
William D. Ryan, Charles M. Jacobs, Alan C. Brewster, and the Purchasers and the
Investors named therein, as amended.
**10.18 Executive Employment Agreement, dated as of March 29, 1993, between the
Registrant to Mr. Kriss, as amended.
**10.19 Promissory note in the principal amount of $201,523, dated March 29, 1993, made
by the Registrant to Mr. Kriss.
**10.20 Stock Purchase Agreement, dated as of March 29, 1993, between the Registrant and
Mr. Kriss, relating to the sale by the Registrant of shares of Common Stock.
**10.21 Letter agreement, dated April 3, 1995, between the Registrant and Mr. Kriss.
**10.22 Promissory note in the principal amount of $75,000, dated January 2, 1996, made
by the Registrant to Mr. Kriss.
**10.23 Letter agreement, dated as of January 20, 1996, between the Registrant and Mr.
Kriss.
**10.24 Common Stock Purchase Option, dated as of January 20, 1996, between the
Registrant and Mr. Kriss.
**10.25 Letter agreement, dated April 29, 1996, between the Registrant and Mr. Kriss.
**10.26 Form of Stay Agreement, dated July 14, 1995, between the Registrant and each of
Mr. Corum, Ms. Endyke, Mr. Price and Ms. Throop.
</TABLE>
II-3
<PAGE> 73
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------------------------
<C> <S>
**10.27(a) Letter agreement, dated November 16, 1993, between the Registrant and Silicon
Valley Bank, relating to a $1,000,000 line of credit, and related instruments.
**10.27(b) Letter agreement, dated November 16, 1993, between the Registrant and Silicon
Valley Bank, relating to a $1,500,000 line of credit, and related instrument.
**10.28 Loan Modification Agreement, dated as of June 30, 1994, between the Registrant
and Silicon Valley Bank, relating to the Registrant's $1,000,000 of credit.
**10.29 Loan Modification Agreement, dated as of May 5, 1995, between the Registrant and
Silicon Valley Bank, relating to the Registrant's $1,000,000 of credit.
**10.30 Loan Modification Agreement, dated as of May 5, 1995, between the Registrant and
Silicon Valley Bank, relating to the Registrant's $1,500,000 of credit.
**10.31 Loan Modification Agreement, dated as of January 5, 1996, between the Registrant
and Silicon Valley Bank, relating to the Registrant's lines of credit.
**10.32 Loan Modification Agreement, dated as of May 24, 1996, between the Registrant
and Silicon Valley Bank, relating to the Registrant's lines of credit.
**+10.33 Letter agreement, dated February 28, 1996, between the Registrant and Ethicon
Endo-Surgery, Inc.
**+10.34 Marketing and License Agreement, dated March 22, 1996, between the Registrant
and SpaceLabs Medical, Inc.
**+10.35 Letter agreement, dated February 6, 1996, between the Registrant and Marquette
Electronics, Inc.
**10.36 Form of standard Software License of the Registrant.
**10.37 Letter agreement, dated June 28, 1996, among the Registrant and the Purchasers,
terminating the letter agreement, dated April 27, 1993, among such parties.
**11 Computation of income (loss) per common share.
23.1 Consent and opinion on consolidated financial statement schedules of Arthur
Andersen LLP, Independent Public Accountants.
**23.2 Consent of Bingham, Dana & Gould LLP, counsel to the Registrant (included in
Exhibit 5.1).
**24 Power of Attorney (included in signature page to Registration Statement).
**27 Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment requested.
(b) FINANCIAL STATEMENT SCHEDULE:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants on Supplementary Schedule................. S-1
Schedule II -- Valuation and Qualifying Accounts................................... S-2
</TABLE>
- ---------------
** Previously filed.
All other schedules are omitted because they are not required or because
the required information is given in the Consolidated Financial Statements or
Notes thereto.
II-4
<PAGE> 74
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, or persons controlling the Registrant
pursuant to the foregoing provisions, the Company has been informed that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer, or controlling person of the Company in the successful
defense of any action, suit, or proceeding) is asserted by such director,
officer, or controlling person, in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of competent
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) It will provide to the Underwriters at the closing specified in
the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
II-5
<PAGE> 75
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Registration Statement on Form S-1
to be signed on its behalf by the undersigned thereunto duly authorized, in the
Town of Westborough and the Commonwealth of Massachusetts, on the 24th day of
September 1996:
MediQual Systems, Inc.
By /s/ ERIC A. KRISS
-------------------------------------
Eric A. Kriss
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------------- ----------------------------------- -------------------
<C> <S> <C>
/s/ ERIC A. KRISS President, Chief Executive Officer September 24, 1996
- ------------------------------------- and Director (Principal Executive
Eric A. Kriss Officer)
/s/ WILLIAM C. PRICE Vice President and Chief Financial September 24, 1996
- ------------------------------------- Officer (Principal Financial
William C. Price Officer and Principal Accounting
Officer)
* Director September 24, 1996
- -------------------------------------
Alan C. Brewster
* Director September 24, 1996
- -------------------------------------
David Dominik
* Director September 24, 1996
- -------------------------------------
Charles M. Jacobs
* Director September 24, 1996
- -------------------------------------
William D. Ryan
</TABLE>
*By /s/ WILLIAM C. PRICE
------------------------
William C. Price
as Attorney-in-Fact
II-6
<PAGE> 76
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTARY SCHEDULE
To MediQual Systems, Inc.
We have audited, in accordance with generally accepted auditing standards,
the financial statements of MediQual Systems, Inc. as of December 31, 1994 and
1995 and for each of the three years in the period ended December 31, 1995,
included in the Registration Statement, and have issued our report thereon dated
April 26, 1996 (except with respect to the matter discussed in Note 9, as to
which the date is June 19, 1996). Our audit was made for the purpose of forming
an opinion on those financial statements taken as a whole. The schedule listed
in Item 16(b) is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein, in relation to
the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
April 26, 1996 (except with respect
to the matter discussed in Note 9, as
to which the date is June 19, 1996)
S-1
<PAGE> 77
SCHEDULE II
MEDIQUAL SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ACCOUNTS BALANCE AT
BEGINNING OFFSET TO WRITTEN ACCOUNTS END OF
OF YEAR REVENUE OFF RECOVERED YEAR
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1993
Allowance for Doubtful
Accounts................... $ 275,000 $ 367,812 $ 477,212 $ 34,400 $ 200,000
Year Ended December 31, 1994
Allowance for Doubtful
Accounts................... $ 200,000 $ 426,700 $ 475,188 $ 23,488 $ 175,000
Year Ended December 31, 1995
Allowance for Doubtful
Accounts................... $ 175,000 $ 570,530 $ 688,586 $ 143,056 $ 200,000
</TABLE>
S-2
<PAGE> 78
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ----------------------------------------------------------------------
<C> <S> <C>
**1 Proposed Form of Underwriting Agreement.
**3.1 Amended and Restated Certificate of Incorporation of the Registrant.
**3.2 Amended and Restated By-Laws of the Registrant.
4 Specimen Certificate for shares of the Company's Common Stock.
**5 Opinion of Bingham, Dana & Gould, LLP counsel to the Registrant,
regarding the legality of the shares of Common Stock.
**10.1 1987 Nonqualified Stock Option Plan of the Registrant, as amended.
**10.2 Form of 1996 Stock Incentive Plan of the Registrant.
**10.3 Form of 1996 Employee Stock Purchase Plan of the Registrant.
**10.4 Lease of Westborough Office Park Building Two, dated as of July 21,
1986, between WRC Properties, Inc. and the Registrant (the "Lease").
**10.5 First Amendment to the Lease, dated as of September 22, 1987, between
WRC Properties, Inc. and the Registrant.
**10.6 Second Amendment to Amended and Restated Lease, dated as of July 1989,
between WRC Properties, Inc. and the Registrant.
**10.7 Third Amendment to Amended and Restated Lease, dated as of December
31, 1990, between WRC Properties, Inc. and the Registrant.
**10.8 Fourth Amendment to Amended and Restated Lease, dated as of September
22, 1993, between WRC Properties, Inc. and the Registrant.
**10.9 Fifth Amendment to Amended and Restated Lease, dated as of December
1993, between WRC Properties, Inc. and the Registrant.
**10.10 Sixth Amendment to Amended and Restated Lease, dated as of April 30,
1996, between WRC Properties, Inc. and the Registrant.
**10.11 Stock Purchase Agreement, dated March 31, 1984, between William D.
Ryan and the Registrant.
**10.12 Form of Stock Purchase Agreement, dated as of August 4, 1986, among
the Registrant and the purchasers named therein, as amended, relating
to the sale by the Registrant of shares of Class B Convertible
Preferred Stock.
**10.13 Form of Stock Purchase Agreement, dated as of October 1987, among the
Registrant and the purchasers named therein, as amended, relating to
the sale by the Registrant of shares of Series 1987 Class B
Convertible Preferred Stock.
**10.14 Stock Purchase Agreement, dated as of April 1, 1993, among the
Registrant and the purchasers named therein (the "Purchasers"), as
amended, relating to the sale by the Registrant of shares of Class C
Convertible Preferred Stock.
**10.15 Form of letter agreement, dated as of April 27, 1993, among the
Registrant and the Purchasers relating to possible issuance by the
Registrant of additional shares of Class C Convertible Preferred
Stock.
**10.16 Registration Rights Agreement, dated as of April 27, 1993, among the
Registrant, the Purchasers and the Investors named therein.
**10.17 Agreement of Shareholders, dated as of April 27, 1995, among the
Registrant, William D. Ryan, Charles M. Jacobs, Alan C. Brewster, and
the Purchasers and the Investors named therein, as amended.
</TABLE>
<PAGE> 79
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ----------------------------------------------------------------------
<C> <S> <C>
**10.18 Executive Employment Agreement, dated as of March 29, 1993, between
the Registrant to Mr. Kriss, as amended.
**10.19 Promissory note in the principal amount of $201,523, dated March 29,
1993, made by the Registrant to Mr. Kriss.
**10.20 Stock Purchase Agreement, dated as of March 29, 1993, between the
Registrant and Mr. Kriss, relating to the sale by the Registrant of
shares of Common Stock.
**10.21 Letter agreement, dated April 3, 1995, between the Registrant and Mr.
Kriss.
**10.22 Promissory note in the principal amount of $75,000, dated January 2,
1996, made by the Registrant to Mr. Kriss.
**10.23 Letter agreement, dated as of January 20, 1996, between the Registrant
and Mr. Kriss.
**10.24 Common Stock Purchase Option, dated as of January 20, 1996, between
the Registrant and Mr. Kriss.
**10.25 Letter agreement, dated April 29, 1996, between the Registrant and Mr.
Kriss.
**10.26 Form of Stay Agreement, dated July 14, 1995, between the Registrant
and each of Mr. Corum, Ms. Endyke, Mr. Price and Ms. Throop.
**10.27(a) Letter agreement, dated November 16, 1993, between the Registrant and
Silicon Valley Bank, relating to a $1,000,000 line of credit, and
related instruments.
**10.27(b) Letter agreement, dated November 16, 1993, between the Registrant and
Silicon Valley Bank, relating to a $1,500,000 line of credit, and
related instrument.
**10.28 Loan Modification Agreement, dated as of June 30, 1994, between the
Registrant and Silicon Valley Bank, relating to the Registrant's
$1,000,000 of credit.
**10.29 Loan Modification Agreement, dated as of May 5, 1995, between the
Registrant and Silicon Valley Bank, relating to the Registrant's
$1,000,000 of credit.
**10.30 Loan Modification Agreement, dated as of May 5, 1995, between the
Registrant and Silicon Valley Bank, relating to the Registrant's
$1,500,000 of credit.
**10.31 Loan Modification Agreement, dated as of January 5, 1996, between the
Registrant and Silicon Valley Bank, relating to the Registrant's lines
of credit.
**10.32 Loan Modification Agreement, dated as of May 24, 1996, between the
Registrant and Silicon Valley Bank, relating to the Registrant's lines
of credit.
**+10.33 Letter agreement, dated February 28, 1996, between the Registrant and
Ethicon Endo-Surgery, Inc.
**+10.34 Marketing and License Agreement, dated March 22, 1996, between the
Registrant and SpaceLabs Medical, Inc.
**+10.35 Letter agreement, dated February 6, 1996, between the Registrant and
Marquette Electronics, Inc.
**10.36 Form of standard Software License of the Registrant.
**10.37 Letter agreement, dated June 28, 1996, among the Registrant and the
Purchasers, terminating the letter agreement, dated April 27, 1993,
among such parties.
</TABLE>
<PAGE> 80
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ----------------------------------------------------------------------
<C> <S> <C>
**11 Computation of income (loss) per common share.
23.1 Consent and opinion on consolidated financial statement schedules of
Arthur Andersen LLP, Independent Public Accountants.
**23.2 Consent of Bingham, Dana & Gould LLP, counsel to the Registrant
(included in Exhibit 5.1).
**24 Power of Attorney (included in signature page to Registration
Statement).
**27 Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment requested.
<PAGE> 1
Exhibit 4
[LOGO] [LOGO] [LOGO]
NUMBER SHARES
MEDIQUAL SYSTEMS, INC.
MS INCORPORATED UNDER THE LAWS OF THE SEE REVERSE FOR
STATE OF DELAWARE CERTAIN DEFINITIONS
COMMON STOCK
- -------------------------------------------------------------------------------
THIS IS TO CERTIFY that CUSIP
is the onwer of
- -------------------------------------------------------------------------------
full-paid and non-assessable shares of Common Stock of the par value of $.001
each of
[CERTIFICATE OF STOCK]
============================ MEDIQUAL SYSTEMS, INC. ===========================
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed.
This Certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the signatures of its
duly authorized officers.
Dated
SECRETARY MEDIQUAL SYSTEMS, INC PRESIDENT
CORPORATE
SEAL
DELAWARE
*
[COPYRIGHT] SECURITY-COLUMBIAN UNITED STATES BANKNOTE COMPANY 1960
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(NEW YORK, N.Y.)
TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE> 2
The Company will furnish without charge to any shareholder who so requests
a full statement of, and the authority of the Board of Directors to fix, the
designation, relative rights, preferences and limitations of the shares of each
class of stock, or series thereof, authorized to be issued.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT-____Custodian _____
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform
JT TEN - as joint tenants with right of Gifts to Minors
survivorship and not as tenants Act_______________
in common (State)
Additional abbreviations may also be used though not in the above list.
For Value Received,___________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares
- ------------------------------------------------------------------------
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
- -----------------------------------------------------------------------
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
---------------------------
-----------------------------------------------------------
THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NOTICE: NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of this
Registration Statement.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
September 23, 1996
